What Is A Futures Contract And How Are They Traded?

A futures contract is a standardised agreement to buy or sell a particular type, quantity or grade of commodity or financial instrument at a specified time and place in the future. Futures contracts can only be exchange-traded and are legally binding documents which are also subject to strict regulation by the market exchanges themselves, e.g. the New York Board of Trade, New York Mercantile Exchange, Chicago Mercantile Exchange, Chicago Board of Trade, Kansas City Board of Trade, Minneapolis Grain Exchange, London Metals Exchange, Eurex Frankfurt, and the Singapore Exchange. The exchanges lay down the contract specifications for both cash and futures contracts.

The futures markets are classified into key market sectors, with each comprising a 'basket' of assets. For example, the futures in industrials comprise crude oil, gasoline, heating oil, lumber, natural gas and propane. The other sector categories include stock indices, metals such as gold, silver and platinum, currencies, grains including wheat, corn and rice, and meat.

When trading in futures, the investor is attempting to forecast the value of a commodity or an index. The absolute imperative in the high-risk world of futures trading is access to the best analysis available.