In trading, a “future” or “future contract” is a contract which gives a buyer the right to sell an underlying asset or a buyer the right to buy an underlying asset at a predetermined time for a predetermined price.
The transaction involved in a futures agreement is known as a forward transaction. This type of transaction provides a seller or a buyer with the security of knowing that they will be able to buy or sell assets at an agreeable price regardless of market supply and demand.
Futures are commonly used to secure investments in commodities. For example, agricultural futures provide farmers with a guarantee that they will be able to sell their produce before they invest in growing the produce. Mining futures provide mining companies with the security of knowing that they will sell the commodities they mine before they invest in mining those commodities.
Manufacturers use futures to secure the commodities which they need to manufacture their products at a reasonable price even if shortages or strong market demand drive prices up in the future.
Futures are a popular speculative instrument because if the price of the underlying asset rises above the price guaranteed by the future contract by the time the contract matures, the assets can be purchased at the guaranteed price and then resold at a higher price – earning the buyer a profit.
Likewise, if the price of the assets fall below the price guaranteed by the future contract, the seller of the underlying assets can sell their assets at a guaranteed price which is higher than the market price – earning the seller a profit.
Trading of futures takes place on special futures exchanges. Futures can also be bought and sold on some stock exchanges. Deferred checks are sometimes used as futures contracts.
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