Futures are financial contracts that obligate a buyer to buy an asset (or its cash equivalent) at a specified price and on a specified future date, and a seller to sell it. These assets can be commodities, securities, currencies or even financial indices. Futures are traded on specialized futures exchanges and are standardized, which facilitates trading between parties.
Possibilities:
- Speculation: Futures are often used for speculative purposes as they allow traders to profit from price movements in the underlying asset without having to own it.
- Hedging: Companies often use futures to hedge against price fluctuations in their industry, which gives them more financial stability and predictability.
- Leverage: Futures require an initial margin that is only a fraction of the value of the underlying contract, giving traders significant leverage.
- Liquidity: Many futures markets are very liquid, which enables fast trading transactions.
Advantages:
- Leverage: The ability to control a large position with relatively small capital can increase potential returns.
- Diversification: Futures provide access to different markets and asset classes, which can lead to better diversification.
- Hedging against price risks: Futures are a key instrument for hedging price risks and can help to stabilize cash flows and hedge price risks for commodities and currencies.
- Transparency and pricing: Prices are set publicly on the futures exchanges, which leads to a high level of transparency.
- No time lag: Unlike some other forms of investment (such as real estate), futures do not require long periods of time to buy, sell or transfer.
Disadvantages:
- Leverage risk: Leverage can increase the risk and lead to large losses that exceed the original investment.
- Market volatility: Futures markets can be very volatile and small market changes can have a large impact on the value of futures positions.
- Complexity: Futures trading is complex and requires a good understanding of the markets and contract trading.
- Overnight risk: Positions held overnight are exposed to the risk of price changes that may occur outside trading hours.
- Margin calls: In the event of unfavorable price movements, traders may be asked to deposit additional margin (collateral), which can lead to liquidity problems.
- Expiration dates: Futures contracts have expiration dates after which the contract becomes worthless, which influences the trading strategy.
Futures trading offers both opportunities and risks and is best suited to experienced investors who understand market conditions and the technical aspects of futures trading. It is also important to carry out a careful risk assessment and apply risk mitigation strategies such as stop-loss orders and position limits.
