What is Commodity Futures?

The futures market is a platform that allows small-time investors to control vast amounts of assets such as gold, currencies, and agricultural commodities by investing modest sums of money.

A commodity futures stock is a legal contract to provide or receive delivery of a specific commodity, index, bond, or currency at a predetermined date or price, depending on whether you are selling or purchasing. A futures contract can comprise anything from a typical pound of wheat to a barrel of oil or a country’s currency. The contract’s amount and delivery date are announced in advance, yet delivery is practically never taken because contracts are bought and sold for speculative or hedging purposes.

Those who use the actual commodity, as well as investors, use futures. For example, a farmer may grow corn in June but has no idea how much corn will sell for in December. He can sell a December futures contract and “lock in” the future selling price today to protect his crop investment. Investors, on the other hand, can buy a futures contract if they believe the price of a security will rise, or sell a futures contract if they feel the price of a security will fall.

Read more: Returns on investment in Indian Stock Market

Futures and Options Are Not the Same

In an online share trading portfolio, futures are frequently lumped in with options. While they are both derivatives in the sense that their value is derived from a base security, there is one key distinction. While options provide the right to buy or sell the underlying security but not the obligation, a futures contract provides a legally enforceable commitment to buy or sell the same commodity. As a result, while options limit your loss to the cost of the option, futures trading can result in a loss of your entire investment and more in order to pay that commitment.

The use of word margin in stock exchange is another distinction between the futures and equity markets. Although currency contracts are substantial, an investor does not require to buy or sell the entire contract. Rather, a margin deposit is kept on the contract, which is a “good faith” amount of money that ensures your commitments to the full amount of the futures contract. Minimum margin requirements vary by broker, although they are normally a small percentage of the contract’s total value and have nothing to do with the contract’s real pricing. Futures trades must be done through futures brokers, who offer both full-service and discount services, and may be affiliated with the stock brokerage firm with whom you are already familiar. Discount stockbrokers, on the other hand, do not deal in futures contracts.

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