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Back to the...Future(s)
You know how we talked about CFDs and that there’s a “contract” between the trader and the broker so that the trader has more flexibility when trading? Well, futures are kinda like that too, in a way.
Similarly to CFDs, futures also involve an agreement between trader and broker. In this case though, the trader is given the ability to buy or sell an asset at a specific price and at a specific date in the future. This kind of contract could be either for commodities or financials, and the former can be categorised as hard or soft.
Now you’re probably wondering what’s hard and what’s soft? Well, hard commodities are natural resources like gasoline, crude oil, heating oil, platinum, gold, etc, whereas soft commodities include agricultural products like orange juice, coffee, live cattle, cocoa, cotton and many others! Let’s look at an example though, shall we?
So, a cocoa farmer per say, wants to make sure that he’ll sell his cocoa at a good price as he’s worried about the extreme weather conditions. Sounds reasonable, no?
Similarly, a chocolate factory also wants to “secure” the price of cocoa so that they won’t have to worry about a future increase in the cost of producing the chocolate. In this case, with the Futures contract, both the farmer and the factory will commit to trading cocoa at a predetermined price, and at a specific date in the future.
Now moving on to financial futures, these include assets such as stocks, funds, bonds, currencies, ETFs etc.
The Futures exchanges’ aim is to basically make sure that both parties, buyers and sellers, honour their contract in order to eliminate the credit default risk.
Now you know what futures are! Congrats!
