Futures contracts

What are futures contracts?

Futures contracts are relatively safe for investors, taking into account achievable returns. Investors, however, must know the rules of their operation well and apply loss limiting mechanisms (STOP LOSS). Futures contracts are primarily an alternative to the stock market because they allow you to earn both on declines and increase in their value.

A contract is an agreement whereby the buyer commits himself to acquire a specific commodity, called the underlying instrument at a given price in the future, and the seller agrees to sell it. The underlying instrument for contracts may be various economic values ​​that can be measured. There are many types of instruments on world markets. price of raw materials (gold, oil) or agricultural products (corn, maize).

The emergence and development of derivative instruments, including futures, was the result of the dynamic development of trade that took place in Europe four hundred years ago. In 1605, the Amsterdam Stock Exchange first started trading rights to buy or sell so-called. base instrument, eg bulbs of tulips.

This gave rise to the development of a futures market for the protection of the trade in tulips. In practice it was that the growers and exporters of the plant used the opportunity to protect themselves against the loss of loading of valuable tulip bulbs in the wake of a sea catastrophe and to set the selling price of a single bulb in advance.

In the event of loss of a vessel, the breeder exercised his right of purchase or sale, fulfilling the terms of the contract. In this way, the beginnings of „hedging”, the means of securing income, have also emerged. The idea of ​​securing against possible losses has led to market revival and increased turnover and the importance of this type of transaction.

In the mid-nineteenth century, the US futures market became much more widely traded, where corn futures started trading. However, the introduction of financial instrument contracts in the early 1970s triggered a huge increase in the importance of the futures market and led to the fact that it plays the most important role in the entire futures market system.

Investing in futures and options: