What is a Futures Contract?

What is a Futures Contract?

A Futures Contract or simply a “futures” is a non-standardized agreement known as forward contract made on the trading platform of Futures Exchange between a seller and buyer to sell commodities or buy gold, interest rates, stocks or currencies at the predetermined price in the future.  This financial process is used to reduce the risk of losing profit due to inflated price of the asset in the future.

While the Futures Exchange stands as the mediator between the two parties, it also facilitates the process by engaging both parties to open an account in respect of the trading known as Margin. On a wider note, gold investors see the payment and delivery date of asset is fixed after negotiation otherwise known as Delivery date and the seller in this trading is referred to as Short (short position status) while the buyer is known as Long or retaining long position status.

The main factor that attracts most businesses and China gold investors into trading in Futures is the unstable world’s major currencies. The exchange rate is tending to fluctuate periodically and prices are likely to change on daily basis, an event that poses a financial risk to businesses. But with this agreement in place, both parties balance the difference in change of prices from the Margin which they are charged to fund in case it becomes exhausted.

Advantages and disadvantages of Futures Contract

Though a Futures Contract is known to be a lucrative investment and attracts huge profits but it also has a negative side which tends to be risky financially.

Advantages

* It could generate big gain with little fund invested.

* It attracts small commission charged to trade

* It enables high liquidity

* A gold traders can transform from short position to long position vice versa.

Disadvantages

* A flawed hedging could pose a risk

* It becomes risky due to unpredicted leverage

* It is a fixed price agreement on a standardized asset for gold exchange

* It could lead to over-trading due to low commission charged.

Article contributed by Investing Gold Futures.