Futures Trading
Futures Trading is a contract to buy or sell a commodity on a specific date in the future. The commodity can be stocks, bonds, foreign currency, or corporate equity. The contract states that the price will be determined on supply and demand at the time of purchase or sale of the said contract.
A futures contract holds both parties liable to fulfill the contract on the specified date. Delivery and payment of items must be made. Futures contracts are exchange traded, which means that the exchange clearinghouse will serve on all contracts as a counterparty. Futures are also standardized and margined.
There is less credit risk involved with futures. Standardizing these contracts holds each party liable and the contract has a standard format from which to follow. In the contract, there is always specified the delivery month, the last trading date, the currency, the amount and the underlying asset, as well as the type of settlement to be made and other details that may be needed.
By margining, credit risk is eliminated because prices are updated daily. Posting a performance bond , which is a small percentage of the contract's value, is what traders use to post a margin and minimize credit risk. Cash settlements and physical deliveries are the two ways the contract can be satisfied.
With a cash settlement, the cash payment is made according to the closing value of the stock market. By physical delivery, the asset of the contract is delivered by the seller to the buyer.
There are lots of different tradable commodities such as money market, bond market, foreign exchange market, equity index market, and soft commodities market. Hedgers and speculators are the two types of groups who trade futures.
Options are traded on futures quite often. There are regulations on futures contracts by the Commodity Futures Trading Commission. They can fine or punish anyone who breaks rules. Each trade can have its own rules, but the CFTC regulates everything.