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The Curious Bag
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Futures trading generally is thought of as being more complex than typical stock and bond trading because it involves creating a contract for commodities to be delivered at a later date, based on a market price.
The Contract
A futures contract is unique from other forms of trading because once the contract is created, you are required to buy or sell. Essentially, a futures contract is a promise to make good on the deal at a later date.
Traditional Commodities
Commodities, stocks and bonds all can be traded using futures. Many investors use futures as a way of hedging or covering other investments in commodities or stocks.
Other Commodities
Futures trading also can be used for non-traditional commodities, such as currency, oil or other financial metrics.
The Strategy
Basically, you trade futures when you believe you have a good sense of what a commodity is going to do in the next few minutes, hours, days or even years. For instance, if you think oil is going to go up, you can purchase oil futures at current levels. On the other hand, if you believe something will go down, you can short it.
Risks
Futures contracts are different than other contracts because the margins must be cleared out daily. Therefore, it can be risky to trade futures because you will need the capital to cover your losses.
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