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What Are Futures and Should I Invest in Them?

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The Long and Short of What Futures Are

What Are FuturesIf you are still new to the world of investment then you may be asking what are futures. They are financial instruments very similar to the stocks and bonds that you may have traded before. However, these assets are distinguished by the future date of the contract involved.

When two parties wish to trade in futures contracts, they use a futures exchange as an intermediary. The buyer purchases a contract, which stipulates that a certain asset will be delivered on a certain date for a certain price. Typically, buyers pick futures contracts when they believe that the value of the asset will rise before that date is reached so that they can sell the contract for a profit.

The buyer of the futures contract is referred to as long, since he hopes that the price will increase. The seller is called short because he believes that the value of the contract will decrease. Often the underlying asset is a commodity but it could also be currency or even other financial instruments.

This type of investment is allegedly ancient. The first futures exchange market was established in Japan in the 1730s. The first standardized trade in such assets was first recorded on the Chicago Board of Trade in 1864.

 What Are Futures and Why Should I Invest in Them?

Futures are not for all traders. Their purchase is a very tricky business because there are always going to be winners and losers. When you invest in a typical stock, it is possible that everyone involved will come out with a profit if the company is well managed. With futures, one of the parties is going to misjudge the value of the contract and lose money in the bargain. It is crucial for each party to understand what are futures in order to profit.

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