What is Futures, Stock Index, Commodities & Stocks?

What are Futures?

Futures are traded and transacted in contracts, this is a contract it's an agreement between 2 parties who agree to sell or buy a commodity or a financial instrument at an agreed preset price at a later date in the future.

The quantity of the contract and lot is specified

The date of delivery is also specified

The above are also specified in the contract. These are known as "specifications"

At the opening of this contract, everything is set but not the opening price (the delivery price is set, this is opening price for the begin of the contract trading.)

Futures can either be Commodities or Financial Instruments

Commodities - Gold, Silver, Coffee, Wheat, Corn, Soybean, Oil, Natural Gas

Financial/Trading Instruments - Shares, Stocks, Stock Index such as Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx and Cac 40.

Unlike Forex, The Futures market is centralized, these financial trading instruments are traded and transacted in a centralized market, meaning that all trade positions take place in one central market. This also makes the futures trading highly liquid and there is always a buyer or seller willing to buy/sell any contract at any time. Traders also prefer to trade these contracts/lots in the electronic market more than they prefer to buy or sell them in the format of physical goods.

However, lots have dates when they expire, when a contract expires it's liquidated and then the physical goods are delivered to the owner of the contract. If you are trading the futures of commodities like coffee then you will get coffee delivered to your door if you don't liquidate your contract before the expiry date. To avoid this most brokers will automatically liquidate all contracts before the delivery date so that traders keep their money & not get the physical good delivered to them.

How Futures Work?

For example a wheat miller agrees with a farmer who is starting to plant the wheat, that after three or four months when the wheat is ready for harvest, the wheat miller will buy the wheat at for example $1000 per 1 contract specification. And then for the next three months these futures contracts begin to get transacted in the market. If at the end of 3 months, the delivery date, the price is at $900 dollars for the contract, the farmer will still get the $1,000 as agreed, & you as the trader will pay the difference and make loss of $100, on the other hand if by that time the value of the wheat contract future is 1,200 the farmer will get the $1000 & you'll make a profit of $200, from this position.

Hence, the farmer is sure after 3 months; he will get paid $1,000 per the contract specification produced irrespective of whether the price of wheat in the market goes up or goes down within that period.

However, a futures contract will get traded my many traders within these three months & most traders will speculate by trading a contract and holding it for a duration ranging from minutes, hours, days or even weeks. A trader will speculate for an up or down move from which they can earn a profit.

This means that futures contracts are monitored every day & profits & losses for the day are credited to the investor that is currently holding the contract.

How to Trade

Just like FX, the futures market is also leveraged. Hence instead of buying $10,000 worth of shares as it's in the stock market, you as a trader can trade these shares in the futures market & buy for example 5 times the value of your money if you use a leverage option of 5 times. This is what makes the futures market more attractive due to and because of the Leverage - as traders can trade more with the option of trading leverage.

The futures market contract are also subject to expire within a time duration after which this particular instrument won't be available for trading because after this date the contracts are settled and the physical commodities which are specified in this trading contract are delivered.

Commodities

In Platforms the most readily available futures which can be traded and transacted in the exchange market through many Forex brokers include: XAUUSD, Silver and Oil.

Indices

E - mini futures are available for electronic trading. These eminis are popular due to their liquidity & the leverage options offered to trade them. Indices in the financial trading markets can be traded and transacted as futures lots, the index is drawn as a chart & this chart is then traded as a financial trading instruments. (e minis are smaller contracts of the Maxi futures lots, Maxis are only traded by Floor traders & not online, e minis on the other hand are made specifically for electronic trading through online computers. Eminis move $50 while Maxi Contracts move $250 dollars per point)

E - minis are therefore the most regular type provided trading by most brokers as the eminis are designed for computer electronic trading.

Examples include : Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx and Cac 40.

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What is Futures, Stock Index, Commodities & Stocks?

What are Futures?

How Futures Work?

Commodities

Indices