What Are Futures?
Buying and selling tomorrow's prices today.
Imagine you want to buy a toy, but the price keeps changing. One day it’s $10, the next day it’s $12. You’re worried that if you wait too long, the price might go even higher. But what if you could make a deal with the toy store today? You tell them, "I’ll buy this toy one month from now, but I want to pay $10 no matter what." If they agree, you now have a futures contract!
This means:
If the price goes up to $15, you still get to buy it for $10 = great deal for you!
If the price drops to $8, you still have to pay $10 = not so great, but that was the deal.
Either way, both you and the toy store know exactly what will happen, which makes planning easier.
That’s exactly how futures work in real markets! People use them to lock in prices for things like oil, wheat, or even stocks, so they don’t have to worry about big price swings in the future.
What Are Futures?
A futures contract is an agreement between two people to buy or sell something at a set price in the future. Instead of paying now, you just agree on the price and settle up later.
People use futures for two main reasons:
To Make Money (Speculation): Some people try to guess whether prices will go up or down to make a profit.
To Stay Safe (Hedging): Businesses use futures to protect themselves from big price changes. Like a farmer locking in a price for their wheat before it’s even grown!
How Do Futures Work?
Futures trade on big markets, just like stocks. Instead of paying the full amount upfront, traders only need to put down a small part of the money, called a margin. This allows them to control a big trade with just a little money. But be careful! If the price moves against them, they can lose more than they put in.
Example:
You agree to buy 10 ice creams next month for $2 each.
If the price goes up to $3, you still pay only $2, so you save money!
But if the price drops to $1, you still have to pay $2, so you lose money.
Types of Futures
Food and Farm Futures: Things like wheat, corn, coffee, and sugar.
Oil and Gold Futures: Prices for oil, gold, and silver.
Stock Market Futures: Predicting the future price of stocks.
Money Futures: Betting on whether money values will go up or down.
Crypto Futures: Guessing the future price of Bitcoin or other digital money.
The Risks and Rewards
Futures can be exciting, but they’re also risky. If prices move the way you expect, you can make money. If they don’t, you can lose money… sometimes a lot! That’s why experienced traders use risk management strategies, like setting limits on how much they trade.
Wrapping Up
Futures are like making a deal today for something you’ll buy or sell tomorrow. They help people and businesses plan ahead, but they can also be risky. If you want to trade futures, make sure you understand how they work first!
Quick Glossary
Futures Contract: A deal to buy or sell something at a set price in the future.
Margin: A small amount of money traders put down to make a bigger trade.
Leverage: Using a little money to control a big trade.
Hedging: Protecting against big price changes.
Speculation: Guessing how prices will move to make money.