Futures are contracts in which two parties agree to buy or sell a product in the future at a predetermined price. They often involve commodities, currencies, indices or other financial instruments. The agreement, unlike with an option, is fixed for a specific date in the future.
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With a future, you lock in a price today for a transaction that will take place later.
Futures are used to hedge risks or to speculate on price movements. For example, a farmer may use a future to lock in a selling price for their harvest in advance. Investors often use futures to take positions in rising or falling markets. Futures usually involve leverage, meaning you control a large position with a relatively small amount of capital. This increases potential profits, but also potential losses. Therefore, futures are more complex and riskier than directly buying a share.
Short example:
Suppose the price of oil today is €80 per barrel. A trader enters into a future contract to buy 100 barrels of oil in three months at €80 per barrel.
If the market price in three months is €90, the trader can still buy at €80. The €10 difference per barrel results in a €1,000 advantage on 100 barrels.
If the market price falls to €70, the trader must still buy at €80. The €10 difference per barrel results in a €1,000 loss.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.