What are futures?how do they work? pls help me understand...

Question

What are futures?how do they work? pls help me understand...

Answer 1

Futures are trading or speculating a price of a commodity or share for future. You don't buy or sell here. ALl you do here is just enter in to a contract to meet the deadline on or before the set date. You can trade in commodity . This helps the farmers more because with the commodity futures they can sit with calm because they can sell the product which will be harvested after 3 months at todays price.

Answer 2

Futures are trades on an exchange where you agree to buy something in the future at a price you determine today.  For example, I will agree to buy stock X in 1 year for $100.

In one year, if the stock is actually trading at $95 in one year, you owe the exchange $5.  If the stock trades at $105, the exchange owes you $5.

Answer 3

A futures contract is entered into by two people, the long (buyer) and the short (seller).  The contract stipulates a certain amount of a commodity (or agricultural product, or interest rate, or index, or weather) will exchange hands at a certain date for a certain price.  These futures contracts are used for hedging, speculation, and arbitrage.  

For example, a farmer in Kansas wants to lock in the current futures price of wheat he will sell in September.  He would short (sell) a futures contract on wheat that says he must sell 5000 bushels of wheat at $8.07 per bushel in September.  On the other side of the contract, Kellogg's wants to lock in the current price of wheat they need to buy for their corn flakes.  They would go long (buy) a futures contract on wheat that says they must buy 5000 bushels of wheat for $8.07 per bushel.  When September rolls around, if the actual (spot) price of wheat is over $8.07, the farmer got a bad deal (he could have sold his wheat for more but is locked in at $8.07) and Kellogg's got a good deal (they get to buy wheat for cheaper than the going rate).  If the price is under $8.07 a bushel, the opposite is true.  This is hedging with futures and is the original intent of futures contracts.

Recently you've heard about speculators potentially affecting futures prices, especially in oil.  Speculators are merely betting on price movements on the underlying commodities or financial products.  If they thing the price will go up in the future, they'll go long, and if they think the price will go down in the future, they'll go short.  They don't have any real interest in buying or selling oil, just making money.  There are also arbitrageurs who use futures to take advantage of price anomalies.  For example, if the price of gas is way below what it should be, an arbitrageur would buy the gas contract and sell the oil contract.

There are many things you can have futures contracts on.  A brief list: orange juice, corn, wheat, gold, oil, coffee, cotton, currencies, the S&P 500 index, temperatures, hurricanes.