Futures and Options (6)

Futures Contract (3)

If a trader has bought a futures contract, he will sell it to close out when the price has gone up.

On the other hand, if a trader has sold a futures contract, he will buy it back to close out when the price goes down.

The futures market acts as a risk-shifting mechanism, enabling those exposed to these risks to shift them to someone else.

The allure of futures trading is that you don't need a lot of money to start.

You are obligated to put up a percentage of the contract value i.e. you trade on margin.

If the price swings in your favour, you stand to gain the amount of profit that is calculated from the entire contract value.

Of course, if the price swings the other way, your loss is also calculated from the whole contract value.

Thus, because futures allows you to control a larger amount of a product without paying a lot of money upfront, it is high stakes investing.

For a small sum, you could win - or lose - a fortune within minutes.