A futures trading is a contract between the buyer and the seller where the buyer is required to purchase the specified financial asset or commodity. The deal is binding to a fixed future date and price when the deal will be realized. Both parties agree on a fixed price that is termed as future price and related to the demand and supply. While the financial deal may require dealing in cash, the commodity transaction happens with the assets. In the future trading system the amount agreed upon by both the parties has to be deposited beforehand. There are also charges involving margins of the exchange and the brokerage.
One group of the traders are the commercial institutions and individuals who hold an asset like treasury bonds, corn, soybeans, coffee or different type of stocks. This group of people want the value of the asset to increase and also limit the losses if any that occurs in future. The futures trading system helps this group by minimizing their risk from the financial losses if the price of the assets held fluctuate in the wrong direction later on. This type of trading is termed as hedging.
Another group belongs to the speculators who want to benefit from the future price fluctuations. This group’s losses can be on the higher side if the expectations held by them prove wrong. While the contract buying speculator places a call option and expects to benefit from the rising prices, a selling speculator expects to make profit from the prices going downwards.
There are also individual traders who take part in this as hedger but they need to have a diversified portfolio because the losses in the futures trading can be substantial. Because of its complex nature and higher risk the group or individual investor need to be financially resourceful and knowledgeable about its working. A time limit on the investment and the losses that one can afford has to be set beforehand. Futures markets is similar to other financial markets and cyclical in nature so the profits realization may take some time.