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What futures trading means? (Simplest Definition on Internet!)

The term future trading means buying and selling futures contracts on the recognized exchange. In other words, it a contract between two parties, a buyer and a seller in order to buy and sell assets for future at a specified price.  The future trading is also known as commodities marketing.

Future trading is a standardized agreement between a buyer and a seller that trade on an exchange. Several types of investors, companies, and speculators can use this type of trading. Future trading or commodity marketing first came into being in the 1800s at Chicago to allow farmers to buy and sell wheat together.

This concept worked well for both parties the buyer and sellers (farmer and grain deals). The farmers knew to know much their wheat worth and the dealers know how much they will pay. In this way, future trading initiated and people started adopting this concept.

 

How future trading works

As discussed earlier, the concept of trading and how it works, it was first initialized by the agricultural industry where the farmers and grain dealers worked together in order to buy and sell heat. In the same future trading works. A buyer bought some sort of commodities or goods for it company or industry from the party that agrees to provide the stuff (sell).

The one party agrees to buy and the other party has to provide the stuff. This is the basic working of future trading. The company or industry, who wants to sell goods for its own earning bought it from another party and store them for future.

The companies usually look for the best futures broker in order to buy great commodities at good prices and valuable exchange rates. As this is a very crucial step to take, therefore extra care must be taken to provide any kind of bad situation to occur. Usually, the aim of those companies is to make money from the contract itself.

Future trading is something more than commodities

The commodities play a far role in future trading, but sharing beans, grains and corn are not only enough. You can exchange huge appliances as well for the future. The commodities mainly include stuff that is necessary for everyday life only, but the future trading offers to exchange great things for the future as well.

The other things else than commodities include share exchange, a bitcoin exchange, EFTs, and individual stocks and bonds. The other great service that future trading offered recently is bitcoin debuted on the future exchange.

For more understanding let, we consider a simple example. Suppose a person wants to hedge a stock with a U.S. company which is about 500 $, somehow the stocks fall but the individual gets the amount balancing his exposure to the index. Conversely, the same investor is able to buy another big contract in the future.

 

The parameters that a future contract have

The future contracts that can easily bought and sell over exchange rate include the following parameters:

  • The unit of measurement
  • What will be the settlement of trade: either physical delivery of goods or the cash settlements?
  • The number of goods under contract.
  • The currency in which contract is quoted.
  • The dominant currency unit of contract.
  • The grade and the quality of the contract.

Some prominent features

Other than that there are other key features considered while future trading. The prominent features are as follows:

 

  • Pre-Trade Check

 

The major key feature of trading is the ability to make everything sorted out by pre-trade check. This will make trading easier as it helps accepting goods before ordering. However, mostly exchanges still do not have this functionality.

 

  • Segregation of client’s account

 

This is another important feature of trading as it helps to keep a check on the exchange’s individual. The working and reporting of each action taken by that individual. It helps in avoiding risks, provide protection to the investors and it is more efficient.

 

  • Membership

 

The last but not the least and yet the most important aspect of trading is to have a membership of exchange from trading rights. There are two main categories of membership

  • Universal membership
  • Commodities specific membership

Both these serves in the best way to provide all the facilities to the trading companies.

 

Duration of trading order

The trading duration means for how long order is going to remain active. This as well works on two principles that are:

  • Day Order
  • Good until Cancelled order.

 

The Risks and Limitations

Although trading is very common nowadays since its start. However, there also applied some limitations and margins too, as well as by not following those limits the Risks automatically generate. Some of the major risks that might occur during future trading are that if someone borrowed an expensive thing.

Let just suppose someone bought money in huge amount and planned for further exchange it, but what happened if the market moves against him? He will lose all the money and there is no other way left.  Moreover, there will be no one to overcome that loss.

Therefore, one must think wise and act wisely before investing in huge future trade. Because every step is crucial here.

Conclusion

This article described what future trading is and what role it will play in the market. The other meaning of future trading is commodity marketing. It builds a relation between a buyer and a seller. This idea first initiated in 1800 and since then the traders and marketers use it. In short, it is the easiest way to do marketing.

 

About the author

Maria Zahid

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