A futures contract in simple words is a contract made between two parties slated to be executed at a future date. It is an agreement where the buyer and the seller decide the sale of products upon a particular price. And the sale must be executed at that decided price on the decided date.
How did the Futures market come up?
It all began over a century ago when farmers would bring their crops to the market for sale, there would be no assurance of a trade. And chances of the crops going waste were about as high as the crops being unable to meet the demands of the buyers.
This is from where the future trades actually came into practise.
It is much different from stock exchange and other forms of trade where the market is much more volatile. Also the commodities that most commonly come under the futures contract are farmed crops like wheat, corn, barley, oats etc.
It may not be as safe as investing in software like Infinity App, but it still has some great benefits like an increased leverage, higher profits, liquidity and much more.
How do future contracts work?
To explain this, let us take an example. A bread maker is constantly in the need of wheat for his business. But the fact that the prices of wheat vary at irregular intervals makes the bread makers profits from his bread vary as well.
His business would result in losses if he were to purchase wheat at a high price. And so a bread maker who is regularly in need of wheat would want to purchase wheat at the lowest rates possible. If he suspects that the prices of wheat are predicted to rise in near future, he would want to strike a deal with a wheat farmer. In such a deal he will want to fix the future purchase of wheat at today’s price.
In this way the bread maker has assured that even if the wheat prices are to hike in future, he will still get the wheat at the price they have agreed upon. This assures him high profits even during the future times when the wheat prices are high.
Likewise the farmer also gains from a future contract. The sales of crops may also be variable considering the change in wheat prices. But the farmer has assured the sale of his wheat even in times when sale may be low due to high prices. So he gets assured sale of his products.
Yet the farmer ends up selling his crops at a lower price and the bread maker benefits from the futures contract. In such a way, the difference amount is debited from the farmer’s account and credited into the bread maker’s account.