Tuesday, November 07, 2006

What are futures?

Many people trade in future contracts. A future contract is a contract to buy or sell a specify quantity of a commodity, financial instrument, or stock index on a pre-specified date in the future. These contracts are freely tradable up to the time of performance on a futures exchange. This is very similar to stock or bond exchanges. There are future exchanges throughout the world and generally, each one is dedicated to a specific type of financial instrument or commodity, for example, a gold exchange or options (stock futures) exchange.

Futures are also known as derivatives. You are not buying or selling the actual commodity being sold, just the right to buy or sell the commodity on a given date in the future. As a general rule, you will not hold the contract till the maturity date unless you are purchasing for business purpose (such as wheat futures for a large bread factory). You will buy and sell the futures trying to profit on the differences in price s for the underlying commodity.


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