What is futures trading? All you need to know

Futures trading in financial markets refers to trading in contracts of derivative financial contracts. Currency futures, interest rate futures, stock market index futures, and cryptocurrency perpetual futures are just some of the types of futures derivative contracts in today’s financial markets. Future contracts are used by traders as they allow investors to profit from speculation. However, for the same reason, future contracts should be avoided by novice traders and investors as speculation can also lead to unlimited losses. What is a future contract? A future contract is a legally binding document which obliges the purchase of an asset at a predetermined date and price by the holder of the contract. The underlying asset of a futures contract can include physical commodities and financial instruments. Futures contracts were initially developed for acting as a hedge for investments. The predetermined date is known as the expiry date of the contract and the predetermined price is known as the strike price. Each contract itself can be traded by investors in stock exchanges and markets. The price of the futures contract changes based on the underlying asset and thus has no inherent value of its own. The price of the futures contract also changes based on how close the expiry date is and what the price of the underlying asset is in relation to the strike price on the contract. What about leverage? Speculators use derivatives like futures contracts as they can use leverage on such investments and trades. In financial markets, leverage is a technique where investors borrow funds to purchase an instrument with the hopes that the profits from the underlying asset are higher than the cost to borrow. Leverage in the futures contract allows speculators to earn 10X the profits that they would otherwise earn. However, it also means that losses could be unlimited for traders if prices move away from what they expected. Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.