Futures trading is a type of financial activity in which two parties (buyer and seller) agree to buy or sell a specific asset (such as commodities, currencies, or indices) at a predetermined price with delivery or execution on a specific date in the future.
The most important characteristics of futures contracts:
1. Future date: A specific date is determined in advance to execute the contract.
2. Fixed price: A fixed price is agreed upon in advance regardless of market changes.
3. Margin: The trader needs to deposit an initial margin (financial guarantee) to ensure commitment to execute the contract.
4. Regulation: Futures contracts are usually traded on exchanges, making them more regulated and secure compared to unregulated markets.
Reasons for trading futures contracts:
1. Hedging: Protection against future price fluctuations. For example, a farmer wants to fix the selling price of his crop.
2. Speculation: Taking advantage of price changes to make profits.
3. Portfolio diversification: It is used as a tool to reduce risk by diversifying investments.
Advantages of futures:
Great potential for profit due to price fluctuations.
Possibility of using leverage, which allows controlling large amounts with a relatively small investment.
Disadvantages:
High risks due to high fluctuations.
Leverage can lead to significant losses.
The need for a deep understanding of the market to avoid mistakes.