Posted on 18 June 2012.
Those new to investing may naturally be wondering, “What is a futures contract“? A futures contract is a financial instrument that promises to deliver specific commodities on a future date. Futures contracts are traded on the commodity exchange and can be futures for everything from oil to wheat to cotton to U.S. treasury bills. All of these are considered commodities. Futures contracts are for fixed items with a specific price. A futures contract can be an agreement to buy or an agreement to sell a specific commodity at a certain time on a date in the future.
Similar to the price of hamburger at your local grocery store, then price of any commodity is subject to weekly or daily change. If the price of commodities goes up, the buyer of the contract is poised to make money, since he will get the commodities at a lower price that was agreed upon beforehand, and he can then sell it for a higher price, based on the market. In our grocery store example, if you purchase a futures contract for hamburger at .99 cents a pound, and the market price goes up to the point that you can sell your hamburger for $1.59 a pound, then you have a great return on your initial investment. Investing in futures can be quite lucrative, but can also be risky. Prices do not always go up; they can sometimes go down, and when this happens, investors can lose money.
The U.S. is home to eleven different commodities exchanges. Certain futures are traded on particular exchanges. For instance, the Minneapolis Grain Exchange puts an exclusive focus on grain futures. The Chicago Mercantile Exchange focuses on livestock, currency, and meat. The largest commodities exchange in the U.S. is the Chicago Board of Trade. All commodities exchanges are regulated by the Commodities Futures Trading Commission, a governmental commission taxed with overseeing commodities trading, including.
Now when fledgling investors ask, “What is a futures contract?” you will be armed with the right information to share with them.
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