Pete takes a step back from the diving board and explains the futures fundamentals every trader needs to know before they make their own splash.
A standardized agreement (meaning futures contracts are fungible - the goods are able to be replaced by an identical item) between two parties to buy or sell a product at an agreed price on a future date.
Just like stocks, in the futures market, the buyers of the futures contract expects price to increase and the seller of the contract expects the price to decrease.
If you purchase stock on margin, it acts as a partial down payment for the purchase of the underlying asset. Futures margin is money placed on deposit to guarantee each participant has the ability to perform in terms of the contracts and withstand the average daily price fluctuation of the underlying assets (it's sometimes called ‘good faith money’).
Futures have two types of margin:
At the end of each trading day, your account will be marked to market. This basically means that the profit or loss for a position will be cash settled at the end of each trading day.
Check out the video for an example of how mark to market works and affects your margin.
Q: How many contracts result in the physical delivery (i.e. how often does someone have to figure out what to do with 5,000 bushels of wheat)?
A: Less than 2% of all contracts result in physical delivery. The rest are rolled or flattened out.
Q: Do futures contracts replace cash contracts?
A: No they do not. A cash contract is an agreement between 2 parties with specific terms, futures are a standardized contract.
Q: What is the only variable component of a futures contract?
A: Price. Thats the only thing that changes. Everything else is standardized.
Q: Is there only one contract size available?
A: No.
Strategies: N/A
Products Discussed In This Episode: N/A
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