If you’re just like most people, you probably don’t have the slightest idea on what is a futures contract and why should bother with it. Well, don’t you worry because, in this article, we’re going to tell you more about it so you will know how you can take advantage of it.
Investopedia defines a futures contract as an agreement that sets the price of a particular commodity at a particular date in the future. The contract can be for a buy or sell transaction. At any rate, the contract is normally executed on the trading floor.
While some contracts require the physical delivery of goods, others only require settlement in cash. Futures contracts were originally executed between large companies, however, even small traders right now can take advantage of them. But if you’re the average individual trader, you are probably wondering how you can profit from futures contracts.
If you know anything about trading, in general, you already know there are several different instruments that you can buy and sell. You can buy and sell company stocks, currency pairs, and commodity. Futures contracts are simply another type of instrument that you can add to your portfolio.
But how can you profit from a futures contract? From the difference in the buy and sell price. If, for example, you buy a future contract for coconut at $100 per ton on January 1, 2016, but the actual price of coconut is at $110, them you would be making $10 in profit especially if you are selling physically coconuts. However, if the price is at $90 at the specified date, then you are transacting at a loss.
With most future contracts, however, it’s the money that changes hands, not the underlying product, In other words, the contract is for the price of the product and nothing more. Anyway, if you want to learn the specifics of profiting from futures contracts aside from buying and selling coconuts, there are many learning resources online that deal specifically with the subject.
The key factor in making profits is to predict how the price of the underlying instrument might move at the specified period. Unless if you’re doing insider trading (very, very illegal), this is something that’s not easy to do. But there’s one way to get around this: You can study the historic prices of the underlying instruments.
In forex trading, price movements can be determined by trends and charts. Although we have never done any futures contract trading ourselves, it’s not far-fetched to imagine that you can make similar price predictions on the underlying instrument of futures contracts.
Anyway, before you get your hands dirty in trading futures contracts, always make sure to study first before putting any money down. As we said before, there are many resources out there that can help you on the subject.
Pay special attention to the underlying instrument, get to know it intimately, and be knowledgeable about what factors affects its price.