As you must know already, it is possible to invest in buy, hold and sell stocks through any designated stock exchange but there are other indirect ways of dealing in stocks as well. Futures present this unique method for dealing in stocks. We will attempt to outline the meaning and underlying difference between different types of futures in the course of this article.
Futures can be of two types as explained below:
In this type of futures, you enter a contract which specifies sale or purchase of a certain product or commodity in a pre-specified quantity on a future date. It gives the person the right but not the obligation to buy or sell a particular commodity on a future date. It can be used for trading in a variety of commodities or financial products in futures exchanges. This option is particularly useful for hedging against future risk associated with price movement for any commodity or product. It can also be used for purposes of speculation to take advantage of expected price movements in future.
Futures option is a type of options contract in which the sale or purchase of a specific futures contract is agreed upon at a fixed price on a future date. This option gives the right but not the obligation to buy or sell a futures contract on a future date. The buyer of futures option is given the right to assume the futures position for strike price at any point of time before the option expires.
Some of the terms related to futures contract and futures option are defined below:
Strike Price: Strike price refers to the pre-specified price at which you agreed to buy or sell at a later date.
Underlying Asset: It refers to the asset which is being sold or purchased through these different types of futures.
Expiration Date: It refers to the date on which the said contract expires.
Call option: It refers to the decision to buy or sell futures based on expectation of a rise in price for the underlying asset in future.
Put Option: It refers to the decision to buy or sell futures based on an anticipated fall in the price of underlying asset in future.
It is important to have a good knowledge of market factors and a wide exposure to the field of trading before you should consider trading in futures to minimize your losses and plan for higher gains.
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