Here’s what you should know about futures trading

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Complicated financial jargons used in the stock market often become intimidating for beginners. On Money9’s ‘Sarala Money’ series, we try to break down these jargons into the simplest of forms. Investments are a sensitive matter because it involves your hard earned money. Therefore, you should never step into unchartered territory unprepared. Here, we’re talking about a very common term used in stock trading – futures trading.

To understand futures, one must know the basics of derivatives trading. Derivatives are financial contracts that derive value from the price shift of another financial instrument. In simple terms, the price of a derivative tracks the price of another underlying financial item. Now, futures trading involves contracts formed between a buyer and seller to purchase a particular derivative at a predetermined time in the future for a fixed price. The buyer needs to pay a small margin value at the time of initiating the contract.

With time, the contract’s price changes as per market momentum. But, since the trader already bought it at a fixed price, this will generate profit/loss as per the contract’s current price.

A futures contract is available on four different assets – stocks, indices, currency pairs and commodities. The two participants of the contract are known as Hedgers (protects their assets from risks) and Speculators (floor traders).

Futures don’t have any inherent value. They survive on the value of another derivative and these contracts come with an expiry date as well. Unlike stocks, you cannot keep trading a particular futures stock for long. It has a time period that must be adhered to.