What are Futures?
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
Futures contracts are standardized agreements that typically trade on an exchange. One party to the contract agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The other party agrees to provide it.
The futures market can be used by many kinds of financial players, including investors and speculators as well as companies that actually want to take physical delivery of the commodity or supply it.
How futures contracts work?
The futures market is a centralized marketplace for buyers and sellers from around the world who meet and enter into futures contracts. While trading traditionally took place using an open outcry system in exchange trading pits, most exchanges now use electronic trading systems, which reduce costs and improve trade execution speeds.
Each futures contract is specific to the underlying commodity or financial instrument and the date of delivery, and prices for each contract fluctuate throughout the trading session in response to economic events and market activity. Nearly all futures contracts are cash settled and end without the actual physical delivery of the commodity.