What is a Futures contract?

Futures contract: Definition
The futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date, the delivery date. In this contract are negotiated key points for the future buying/selling, including its object, date (period) and price.

The object of futures contracts and their main provisions
The object is a specified asset around which the contract is concluded. The asset itself covers a very broad range, such as the agricultural market products (cereals, coffee, timber, sugar, and cotton), metals (precious and industrial), energy providers (gas, gasoline, and oil), debt securities and currency.

The period may vary between three up to six months. The price is determined at the time of signing the document on the same date as stipulated in the contract. However, either party has the right prior to the ending of the futures contract to buy already sold one or sell the purchased contract.

An advantage of the futures contract in contrast with the traditional is that the first one does not imply any direct movement of goods from the seller to the buyer, and there is no payment required for the basic asset. It would be sufficient to pay only margin (in this case, it is the amount that broken up for the price and the cost of agreed goods), as cash collateral, which is required at the conclusion of the contract.

Each basic asset has the quantity, delivery date and quality standards for clear arrangement and regulation of trading activities related to the futures. The quality indicator has been broken up for the types of the same product (for example, different types of oil, wheat or steel). The result of the standardization is specification; it is a document that is attached to each specific contract. It is made for the buyer and the seller, so they both will have the exact information about the object of the contract, its volume, the delivery date, and the terms and conditions of this trade.

Participants in the futures market
The stock exchange is a guarantor in turnover of the futures contracts. Its task is to keep the rhythm and operability of the market in general, and in particular it oversees the correctness of all the transactions that are made in the market.

The broker is involved in trading on the basis of the necessary license and provides access to the trading operations for the private investors, for which the broker receives an income in the form of a commission.

The trader is legal / individual entity who trades through the broker and wants to make the profit.

Types of the futures contracts
There are mainly two types of futures trading contracts. They are futures contracts which are traded for physical delivery, known as commodities and futures contract which are end with a cash settlement, known as financial instruments. Both types of futures contracts are traded electronically and directly. Futures contracts which are traded for physical delivery includes agricultural commodities like wheat, oats, sugar etc., energy products like crude oil, heating oil, natural gas etc. Futures contracts which are traded for cash settlement involve treasury notes, bonds, etc.

Futures and foreign exchange market
Futures contracts that have high liquidity are also traded in the Forex market. Therefore, in addition to the currency, the traders could try themselves when working with the futures. The essence of futures trading, specifically the margin system provides the admissibility to do transactions with the large funds, while having a modest deposit on the account. However, there is one serious disadvantage that is appropriate for the futures contracts. The margin, the trader must pay often makes a few thousand dollars. This is a small amount in the market, but sometimes for the small investor, private person is unmanageable amount. To solve this problem and simplify the futures trading system, there was introduced another financial instrument, a contract for difference (or CFD) that allows private traders to trade in the market. We will talk about that in the next part.