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.
The futures markets are characterized by the ability to use high leverage relative to other financial markets. Futures can be used to hedge or speculate on the price movement of the underlying asset. For instance, a producer of wheat could use futures to lock in a certain price and reduce risk, or anybody could speculate on the price movement of wheat by going long or short using futures.
Futures contracts are used to manage potential movements in the prices of the underlying assets. If market participants anticipate an increase in the price of an underlying asset in the future, they could potentially gain by purchasing the asset in a futures contract and selling it later at a higher price on the spot market or profiting from the favorable price difference through cash settlement. However, they could also lose if an asset’s price is eventually lower than the purchase price specified in the futures contract. Conversely, if the price of an underlying asset is expected to fall, some may sell the asset in a futures contract and buy it back later at a lower price on the spot.
Essentially, futures trading involves risk, and not everyone is suitable for futures trading. Managed Futures Accounts (MFA) are professionally managed by a team of money managers and Commodity Trading Advisers (CTA) who work together to ensure that the account is structured with the clients’ best interest.