Understanding The Futures Contract

The financial market has seen a lot of changes in recent years. From the traditional floor trading and the stock exchanges to platforms that can now be accessed on your laptop or even your mobile, the trading platform has grown massively. The methods of placing trades are changing but the real idea of how trading is done still stays the same. One of the popular choices of the traders in the futures market.

The future market has its own advantages over the stock market where one buys and holds. It gives traders a lot of flexibility in their trades. You need to understand how the futures market works to be able to take a position in the futures contract on the Bitcoin code.

Futures contract

A futures contract is when two parties enter into an agreement to buy or to sell an asset at a set price on a future date. Most of the futures contract will not involve any physical delivery of the asset being traded and it will be settled in cash. This is why the future is a speculative financial instrument. There could be instances though where the hedgers may want to lock in the prices of a commodity and take its delivery. This is done so that they are saved from the volatility in the prices of the commodity.

The holding period of the futures contract is finite unlike in the stock market. A stock can be traded for years until the company is traded publically. The futures contract is available to trade in all the major assets classes like stocks, commodities, currencies, and indexes. The futures contracts are mostly monthly and the trader has an option to roll it over for the future months.

Trading futures – speculators and hedgers

When the futures contract is traded by the speculators and the hedgers then the speculators need to keep monitoring the price changes regularly whereas the hedgers can set the price and forget about it. Neither of the approaches is better because you have a risk in each method. Thus the approach that you should choose should be such that it lets you avoid risks as much as possible and helps to meet your investment goals.

If you want to make profits from the market then hedging is not the thing for you. If you want to protect the business and avoid paying extra for the raw material that you need then you should be a hedger. Both the market participants impact the futures market in a big way.