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What is futures trading?

Futures are financial contracts that typically trade on an exchange in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date (expiration date). One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date.

The buyer in the futures contract is known as to hold a long position or simply long. The seller in the futures contracts is said to be having short position or simply short. The exchange acts as mediator and facilitator between the parties. In the beginning both the parties are required by the exchange to put beforehand a nominal account as part of contract known as the margin.

Many different commodities, currencies, and indexes are traded in futures, offering traders a wide array of products. Since futures contracts can be bought and re-sold any time the market is open up until the fulfilment date, they are a popular product among day traders. Futures can be used to hedge against risk or speculate the prices.

As an example, the futures contract size for gold is 100 ounces. Thus, if you are buying two gold future contracts, you are in control of 200 ounces of gold. If the price of gold increased by $1 an ounce, your position will change by $200 ($1 x 200 ounces). Each futures contract and commodity have their own unique characteristics.

To learn more about futures trading, please see our futures trading guide.

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