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        What are Futures?

        Views 14k2023.08.09

        Key Takeaways

        • Futures are standardized legal contracts that obligate parties to buy or sell an asset at a predetermined future date and price.

        • Futures contracts consist of commodity futures, stock index futures, currency futures, etc.

        • Futures can be used for hedging or speculation.

        Understanding futures

        Futures contracts (or futures) are standardized legal contracts that obligate the buyer to purchase an asset and the seller to sell an asset at a predetermined future date and price. Contracts are traded at futures exchanges, which act as a marketplace between buyers and sellers. 

        The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date. 

        The buyer of a contract is said to be the long position holder and the seller to be the short position holder.

        Futures trading typically uses high leverage. 

        Based on the underlying assets, futures contracts can be classified into different types, including:

        • Commodity futures such as crude oil, natural gas, corn, and wheat

        • Stock index futures

        • Currency futures

        • Precious metal futures

        Using futures

        Futures can be used for hedging or speculation.

        • Futures for hedging

        Futures can be used to hedge the price of the raw materials or products you sell to protect against potentially unfavorable price changes.

        Let's say an oil producer plans to produce one million barrels of oil over the next year. It is expected to be ready for delivery in 12 months. Assume the current price is $75 per barrel. As oil prices are volatile, the market price at that time could differ greatly from the current price.

        If the oil producer thinks oil will be lower in one year, they may opt to lock in a price now, entering into a futures contract. In this way the producer could produce the oil, and then sell it at the current market prices one year after.

        • Futures for speculation

        A futures contract allows a trader to speculate on the direction of a commodity's price movement.

        A trader could buy a futures contract if bullish on the underlying asset. If the price does rise and is trading above the original contract price before or at expiration, the buyer could close the long position and realize a profit, and no physical product will change hands.

        However, the trader could also lose if the commodity's price is lower than the purchase price specified in the futures contract.

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        This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.

        Moomoo is a financial information and trading app offered by Moomoo Technologies Inc.

        In the U.S., investment products and services available through the moomoo app are offered by Moomoo Financial Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a member of Financial Industry Regulatory Authority (FINRA)/Securities Investor Protection Corporation (SIPC).

        In Singapore, investment products and services available through the moomoo app are offered through Moomoo Financial Singapore Pte. Ltd. regulated by the Monetary Authority of Singapore (MAS). Moomoo Financial Singapore Pte. Ltd. is a Capital Markets Services Licence (License No. CMS101000) holder with the Exempt Financial Adviser Status. This advertisement has not been reviewed by the Monetary Authority of Singapore.

        In Australia, financial products and services available through the moomoo app are provided by Futu Securities (Australia) Ltd, an Australian Financial Services Licensee (AFSL No. 224663) regulated by the Australian Securities and Investment Commission (ASIC). Please read and understand our Financial Services Guide, Terms and Conditions, Privacy Policy and other disclosure documents which are available on our websites and Moomoo Technologies Inc., Moomoo Financial Inc., Moomoo Financial Singapore Pte. Ltd. and Futu Securities (Australia) Ltd are affiliated companies.