Futures Contract: Meaning, Definition, Pros & Cons | 5paisa (2024)

  1. Home
  2. Stock Market Guide
  3. Derivatives Trading
  4. About Futures Contract

5paisa Research TeamDate: 30 Aug, 2023 12:38 PM IST

Futures Contract: Meaning, Definition, Pros & Cons | 5paisa (1)

Futures Contract: Meaning, Definition, Pros & Cons | 5paisa (2)

Content

  • What do You Mean by a Futures Contract?
  • Pros and Cons of Futures Trading
  • Bottom Line

Futures contracts are extensively used for trading in futures exchanges. However, every trader needs a certain degree of experience and knowledge to successfully complete future trades. They arerecognised as binding contracts.They permit the owner as well as that writer to either purchase or sell a respective stock/commodity at a predetermined date and rate in the future.

Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches. Discover below everything you need to know about futures contracts.

What do You Mean by a Futures Contract?

Every finance market enthusiast might be familiar with the term futures contract. A Futures Contract is nothing but a legalised contract designed for two distinguishing parties looking to secure their underlying assets, such as commodities, stocks, and bonds against the volatility of the market. That being said, a futures contract is much more complex in nature.

Hedgers typically look for security against price volatility in the future. Instead of wanting to earn a profit from the respective deal, they look for securing the cost of their products. Thus, it is a given that the profit or loss that might come from the sale is majorly offset by the cost of the underlying assets in the market.
Speculators, however, almost always trade against different trends in the market. They invest in a futures contract to make and attempt to sell it for profit in situations of price rise. Nonetheless, this trading must be done prior to the expiration date of the futures.

Futures trading by itself is a zero-sum game. It plays a quintessential role in ensuring that the prices of the products in the market aren’t impacted. Therefore, it locks the price. It offers complete security against potential price swings not may be predictable in the market.

Futures Contract: Meaning, Definition, Pros & Cons | 5paisa (5)

Pros and Cons of Futures Trading

Profit and loss concerning futures trading are generally boundless. Everyday price swings make these trades rather volatile. Let’s look at some pros and cons of futures trading to learn about this better.

Pros

•One of the unbeatable benefits of futures Contracts is that investors can work with futures prices associated with the underlying asset cost in the market.

•Traders make use of these types of contracts for hedging against potential price drops in the future market.

•Additionally, investors can significantly Dave themselves from paying straight up through leveraging margin.

Cons

•While the benefits of futures contracts are plenty, they come with their own set of risks. Speculators can thus lose initial margins as well if there is an opposite swing in the price.

• Investors may tend to lose out on desirable price perks on entering a futures contract.

•Investors can also encounter potential losses when using margin.

Bottom Line

It goes without saying that the market of commodity futures is extensively volatile. Traders can gain profits or encounter losses based on their skills and expertise. Thus, every futures trading enthusiast must have the required skills and expertise, along with the ability to take risks for encountering successful trades.

More About Derivatives Trading Basics

  • Guidance to Futures and Options Trading in the Stock Market
  • Covered Call
  • What Is Put Writing?
  • Delta Hedging
  • Credit Spread
  • Currency Options
  • Options Hedging Strategy
  • Options And Futures: Understand The Functioning, Types and Other Factors
  • Options Trading for Beginners: A Comprehensive Guide For You
  • Best Options Trading Courses: Things To Know About
  • Short Strangle: How Does It Work In 2023
  • Butterfly Option Strategy
  • Options Selling
  • What Are Stock Options: A Complete Guide 2023
  • What is the Call and Put Option?
  • What are Futures and Options?
  • What is Implied Volatility?
  • What is Open Interest in Options?
  • What is Strike Price?
  • What Is a Call Option?
  • What is a Put Option?
  • How to Choose Best Stocks for Option Trading?
  • Options Trading Tips
  • How to Trade Options?
  • Types of Options
  • Understanding Various Options Trading Strategies
  • What are Options?
  • What is Put-Call Ratio?
  • What is Margin Money?
  • What is an Open Interest?
  • Call Options Basics and How it Works?
  • The Simplest Guide to Futures Pricing Formula
  • What are Bullish Option Strategies?
  • What are the Various Types of Derivatives?
  • What is Bermuda Option?
  • What are Swaps Derivatives?
  • What is an Index Call? Overview of Index Call Options
  • What is Forward Market?
  • What is Settlement Procedure?
  • What is Margin Funding?
  • Derivatives Trading in India
  • Difference Between Equity and Derivatives
  • What are Currency Derivatives?
  • What are Forward Contracts?
  • Difference Between Forward and Futures Contract
  • How to Trade in Futures and Options?
  • What is Meant by Futures in Trading?
  • Stock Index Futures
  • Stocks vs Futures
  • What Are Exchange Traded Derivatives?
  • What is Options Trading?
  • What is Derivative Trading?
  • What is Futures Trading?
  • What are Derivatives?
  • Straddle Strategy
  • Options Strategies
  • Hedging Strategy
  • Difference Between Options and Futures
  • Derivatives Trading Strategies
  • Read More

Learn more

Stock / Share Market Demat Account Online Trading Mutual Funds Commodity Trading Basics IPO Trading Holiday Tax Generic Aadhaar Card Pan Card Savings Schemes International Markets Loans Banking Currency Bond and Debenture Insurance

Open Free Demat Account

Be a part of 5paisa community -The first listed discount broker of India.

+91

Futures Contract: Meaning, Definition, Pros & Cons | 5paisa (2024)

FAQs

Futures Contract: Meaning, Definition, Pros & Cons | 5paisa? ›

They permit the owner as well as that writer to either purchase or sell a respective stock/commodity at a predetermined date and rate in the future. Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging.

What is the meaning of futures contract? ›

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.

What are the pros and cons of options vs futures? ›

The choice between futures and options depends on your investment goals and risk tolerance – Both instruments can be used for hedging, but options offer more flexibility and limited risk. Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses.

What are futures easily explained? ›

Futures are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price. Learn more about the key contract specifications in each futures contract.

What best describes a futures contract? ›

Definition: A futures contract is a contract between two parties where both parties agree to buy and sell a particular asset of specific quantity and at a predetermined price, at a specified date in future.

Top Articles
Latest Posts
Article information

Author: Kelle Weber

Last Updated:

Views: 5331

Rating: 4.2 / 5 (53 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Kelle Weber

Birthday: 2000-08-05

Address: 6796 Juan Square, Markfort, MN 58988

Phone: +8215934114615

Job: Hospitality Director

Hobby: tabletop games, Foreign language learning, Leather crafting, Horseback riding, Swimming, Knapping, Handball

Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.