Futures is a financial contract that asserts the sale of financial instruments (stock) or physical commodities for future delivery, usually on a commodity exchange. Similar to options, futures contracts try to "bet" what the value of an index or commodity will be at some date in the future. Trading in futures wasn't around in the U.S. until the 1850s. It was then that investors started using futures markets to buy and sell commodities such as cotton, corn and wheat. The futures market is a centralized marketplace for buyers and sellers from around the world to meet and enter into futures contracts. Futures pricing can be based on an open cry system, or bids and offers can be matched electronically.
A futures contract is generally a financial contract, in which two parties agree to trade a set of stocks or physical commodities for future delivery at a set price. Both, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than exchange physical goods. That is why futures are used by not only producers and consumers, but also by speculators investing in the market.
Options on futures contracts provide the opportunity to limit losses while maintaining the possibility of profiting from favorable market moves. Options on futures are similar to an insurance policy—the option buyer pays a price or premium in return for the right to buy (call) or sell (put) a futures contact, within a stated period of time at a predetermined price known as the strike (or exercise) price.
In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit made into an account in order to enter into a futures contract. When you open a futures contract, the futures market exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. Thus, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract.
Investing in futures is highly risky, and it is not recommended for investors new to the market. Futures positions are considered highly leveraged because the initial margins are significantly smaller than the cash value of the contracts. The smaller the value of the margin in comparison to the cash value of the futures contract, the higher the leverage. Conversely, the futures market is also a place for people to reduce risk when making a purchase or selling. Risk is reduced, because price is pre-set, therefore it is less likely to be affected by various unpredictable circumstances.
