Candlestick Trading Blog
August 18, 2009
Future Contracts
| Future contracts are contractual agreements to buy or sell particular financial instruments, such as commodities, at a pre-determined price in the future. Two parties agree to a set of terms in order to transact a set of financial instruments for future delivery at a particular price and they agree to the quality and the quantity of the underlying asset. Buyers of future contracts agree to buy an asset that a seller has not yet produced at a set price. Some futures contracts require physical delivery of the asset while others are settled in cash. The futures market is very liquid, complex and is seen by many as risky. Once it is understood however many are able to make great profits. Most buyers and sellers that participate in this market enter primarily to hedge risk (hedging) or to speculate rather than to actually exchange physical goods. When opening this type of contract, the futures exchange will give the minimum amount of money that must deposited into your margin account. This deposit is called the initial margin and once the contract is liquidated, you are refunded this initial margin amount plus or minus any gains or losses that occurred over the life of the future contracts. This initial margin amount is typically about 5% or more of the contract but they can change depending on market volatility. There is also the maintenance margin, which is the lowest amount that an account can reach before more money needs to be added. The amount of money in your margin account fluctuates daily as the market fluctuates, but if your account drops below this maintenance margin amount, then brokers are required to make a margin call. This margin call requires that you deposit more money into your account to bring it back up to the minimum maintenance amount. (See margin buying) Leverage, as it relates to future contracts is another factor to take into consideration in addition to margin. You can enter into a contract of this nature that is worth a lot more than your initial investment. Leverage refers to having control large cash amount of commodities with a small level of capital. Basically, what this means is that you can enter into a contract that is worth more that you initially have to invest, with a relatively small amount of cash. (See margin trading) Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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