Futures that are completely different from spot markets.
Spot markets involve actual goods (commodities) that can be traded, whereas futures are primarily not commodities but standardised, tradable contracts involving certain bulk commodities such as cotton, soybeans, oil, or financial assets such as stocks, bonds, and so on. With futures, it is mainly future events that are agreed upon, and the subject matter can be commodities or financial instruments.
Simply put, with the future, you pay now to buy something in the future.
Corn is now $300 a ton, so if you bought a ton of corn from someone for $300. That's called spot. But if you want to buy this ton of corn a month from now for $300, it's called futures.
But suppose you are a farmer who grows corn for money, but you don't know if corn prices will fall this November.
Therefore, you agreed with the grain harvester to sell it to him at the rate of 300 dollars per ton, no matter the rise or fall of November.
The buyer is worried that he can't sell when the price goes up, and you're worried that he can't sell when the price goes down. So the contract was signed. This contract is called a futures contract.
The broker of this contract is the exchange, which guarantees that both parties will not run away by posting a margin.
Agricultural products, metals, energy, chemicals, and other commodities, are often involved in futures trading.
We often talk about the future as a magical investment tool that can make people rich overnight or poor for generations. Because futures trading is based on margin (small margin supports large contracts), this is why investors can become rich or poor overnight (leverage factor).
Here's an example:
A box of cigars now costs $600, and you sign a futures contract with a supplier that will sell you back at that price three months from now. You put down a $60 deposit to make sure you don't run away.
At this point, your cost is $60.
And when the contract expires, if the price goes up, it becomes $660.
In this case, you perform the contract and then sell it for a net profit of $60.
You're actually only paying $60 in cost, so you're making $60 in profit.
On the other hand, you have to pay $600 and then sell it for $660 to make a profit.
By contrast, the futures business makes 100% at the other side's minimal cost, while the spot business pays ten times the principal, but makes only 10%.
But if the price drops to $550, it will be a disaster! Because you're holding a contract! You have to buy it!
In that case, you spend $610 on cigars; The more you buy, the more you lose.
So, futures trade must be careful, because down you have to buy.
*Futures are not available in Australia on Tiger Trade.
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