Futures are a contract where a person agrees to buy a particular share or commodity at a particular price on a specific date. Here the contracts are of fixed quantity. Both parties are obligated to buy and sell the underlying asset on the predefined date.
Why Futures?
- The person has to pay a fraction of the amount to be invested. In the case of a downward trend, it has to maintain the margin money only. I.E. the investor can have much higher returns as compared to cash buying.
- The brokerage on the futures contract is much lower as compared to the cash market brokerage and is closed only when the trade is opened and closed.
- With 10 times more exposure than the cash market, the speculators can win big money.
- Futures act as the hedge against the fluctuations in prices of the cash stocks a person has.