A futures contract is a standardized legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future.
What Are Futures?
Futures, also known as futures contracts, are legally-binding agreements to trade a given asset or commodity at a previously-agreed date and price in the future. In addition, they track the price movement of an underlying asset or commodity.
Futures fall in the category of derivative financial instruments since their value comes from another asset. To elaborate, investors can use them to track the price of natural gas, the S&P 500 index, U.S. dollar, bonds, Bitcoin (BTC), wheat, etc. In the futures world, expiration dates make a huge influence on the results.
Dates are tied to the expiration month to give a distinctive description. For instance, December Bitcoin futures refer to BTC futures contracts expiring in December.
Notably, futures trading platforms offer leverage functionalities. As such, traders only need a percentage of the total contract value, and the rest is leveraged or borrowed from the platform. The required initial amount is called a margin. A trader’s reputation on creditworthiness and a trading platform’s conditions on leveraged trading determine the margin.
During maturation, a futures contract can be physically settled or cash-settled. Physically-settled futures refer to a type of futures where the underlying asset is exchanged during expiry.
On the other hand, a cash-settled futures contract is used to describe a contract where, upon maturation, the underlying asset is settled by first converting it to cash.
A common term in the futures world is a tick. This is the slightest price movement of a futures contract during a 24-hour period. Note that a tick can indicate an increase or decrease in price.