Understanding Futures Contract

A futures contract is a financial agreement that is a popular investment to yield a profit for an individual or business. A futures contract differentiates from a standard equity purchase where an individual goes into the market and obtains a stock through the seller's asking price.

A futures contract is a standardized agreement between a buyer and seller where the parties agree to exchange equity for a specified price, a standardized quantity, at a specific date in the near future.

The contracts in a futures agreement are for regular equities; however, the transaction is agreed upon for future fluctuations.

Futures contracts, as opposed to regular equity contracts, are purchased and sold on the futures exchange. Futures contracts are not direct purchases of securities like traditional equity contracts, bonds, or government investments, but instead are a form of derivatives.

When the buyer agrees to purchase a futures contract, the underlying asset or equity assumes a long position in a portfolio while the seller assumes the short position.

The price of a futures contract is calculated through the equilibrium between supply and demand among the market. The security in a futures contract can be seemingly any asset; stocks, currencies, interest rates, or indexes can be coupled into a futures contract. Whatever security can fluctuate in price changes can be exchanged under a futures contract.

The most significant portion of the futures contract is the fluctuation of the underlying security's price and the delivery date or date at which the contract matures.

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