Futures trading is a form of derivatives trading that enables you to speculate on the price of an asset without ever owning it. Traders often use futures contracts to hedge their portfolios and limit losses on unrealized gains, but they should be aware of the risks.
Unlike stocks and bonds, futures contracts are specific contracts that involve an agreed-upon amount of assets or securities. For example, a fuel distributor and an oil producer may agree to sell 1 million gallons of oil by a certain date. The parties also agree on the price they will pay for the oil if they deliver it at the end of the contract. Source https://onlinefuturescontracts.com/
The market price of a futures contract depends on various market imperfections, such as transaction costs, differential borrowing and lending rates, and restrictions on short selling. These imperfections prevent complete arbitrage, which is the practice of buying or selling an asset in the future and expecting that the price will rise or fall to reflect the underlying market conditions at the time.
How to Build a Successful Futures Trading Career
Some futures contracts, such as stock index and treasury bond futures, may be influenced by arbitrage arguments when the underlying commodity or security is in plentiful supply (for example, crops before harvest) or when it is freely created (such as Eurodollar or federal funds rate futures). For these types of futures contracts, the market price will vary within arbitrage boundaries around the theoretical price.
Some traders prefer futures trading because it provides a more flexible way to take a large position without requiring a large cash outlay. However, leverage can amplify losses, and you should consider your broker’s margin call and liquidation requirements carefully before using futures as a risk management tool.