Is Future Trading Beneficial? How Does It Do?
Posted by Mitishakanungo on September 16th, 2019
Future contract means you promise to buy or sell an underlying security at a future date and that too at no cost.
If you sell such security, then you have to transfer it to the buyer at some cost.
Future trading is considered as an important means of price discovery and price risk management of commodities like grain, metals, crude oil, etc. but some people also consider it responsible for the rise in commodity prices.
In this blog, we will show you tips about future trading at home for beginners.
How is the futures contract settled?
The future contract ends on the expiry date. For example, every month, the last Thursday working time is over.
Every contract asset or cash expires on the same date by paying the outstanding amount or taking a profit.
If the person taking a futures contract feels that the profit can be made even further, then he can rollover the contract, which means she or he can continue to earn more profit by continuing.
If the person taking the futures contract is not happy with the performance of his contract and anticipates more damage till expiry, she or he can close the contract in the middle and make up the loss.
Commodity derivatives and Future Trading
Based on future performance, “An electronic transaction of a commodity on a particular date for a future date is known as futures trading.”
Future trading is the online buying and selling of commodity derivatives.
The entire business is done through electronic commodity exchanges. First is the Multi Commodity Exchange (MCX) and the second National Commodity and Derivatives Exchange (NCDEX).
These exchanges take margin money from the businessmen or sellers of the commodity in exchange for their services. In return, when one of the parties breaks the terms of the trade, the other party pays the delivery of the product or money according to the terms of the agreement.
This can be better understood through the following example.
Suppose a person named 'ABC' makes a contract with 'XYZ' in May, he will give 100 quintals of wheat to 'XYZ' at the rate of Rs 800 per quintal in November.
'XYZ' in return confesses that he will pay Rs 80,000/- in November instead.
If you analyze this deal closely, you find that many of its things are unique to themselves.
The first thing is that the deal is being done since November in May, that is, the prices of wheat since November are being fixed in May itself.
The second thing is that while signing the deal 'ABC' does not have wheat and ‘XYZ’ does not have money.
This is where commodity derivatives are concerned.
The product whose sale is being signed since November is derivative, means the product for which the deal is being made is the derivative form of the underlying product or in the case, not wheat, which is being traded on the basis.
This unique process of trading is known as Future Trading. Click here to know much about futures trading basics.Also See: Future Trading, Since November, Futures Contract, Future Date, Trading, Future, Contract
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