Online Trading Education

Futures Trading

What is Futures Trading?

Futures trading is when one decides how to trade futures contracts, which then allows specific stocks, commodities or such assets to be traded at a pre-determined price in the future. A futures contract is a standardized contract, traded on a futures trading system called an exchange. It is a contract to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is titled the delivery date or final settlement date. The price is pre-set and is titled: the futures price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an options contract. An options contract gives the holder the right, but not the obligation. For example, the owner of an options contract may exercise the contract. Both parties of a “futures contract” must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, the cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.

Benefits of Futures Trading:

Plenty of leverage
Most futures markets have available around-the-clock trading
Low commissions