What Are Futures? Facts on Futures Series 1 of 6: Fri Jan 17, 2025

You can watch the video and/or review the article below.

Stocks are easy enough to understand for most new traders, as simple ownership in a company. But what in the world are futures, which are even built on baskets of stocks?

Facts on Futures Series Kickoff

Whether you’re brand new or been trading them for awhile, I want to make sure you know the key facts about futures. Starting with “What Are Futures?”

Contractual Agreements

Futures are contractual agreements. They’re to buy or sell a particular standardized asset. This means each futures contract is the same and pertains to the same value and the same entity. They are at predetermined price in the future as well. So we are agreeing to exchange that standardized asset for a price out in the future that we’re agreeing on now.

Legally Binding

Futures are also legally binding. You may have heard these little myths that if you buy say cattle futures and you don’t exit your contract that a bunch of cattle are going to show up on your lawn. It’s not quite that extreme, but yes they are legally binding and you do need to make sure you manage your ownership of futures positions accordingly.

Exchange Traded

Futures transactions are facilitated on an exchange, which guarantees the other side of each trade. So buyers and sellers know that they’re going to have a counterpart. That’s important because in this day and age there’s so many new markets coming up – new stocks, all kinds of things, crypto. The security of being on an exchange is very important.

Fungible

Futures have identical specifications on all the contracts. This is something called fungibility. Think of a US dollar bill, one US dollar bill and another.  US dollar bills are fungible, because they can be exchanged even though they’re two different pieces of paper. So this makes for easier trading. And the price of the futures is discovered through bidding and asking until a match occurs.

So there’s the basics in my Facts on Futures series, stay tuned for more!

2 responses to “What Are Futures? Facts on Futures Series 1 of 6: Fri Jan 17, 2025”

  1. William Fickett Avatar
    William Fickett

    So how are they different from options? I am familiar with options. I haven’t gotten into futures because I know there’s a few differences and would like to know more about futures. Certainly don’t wanna make a mistake. I do know several people I have read online. I follow prefer futures anyway thank you very much.

    1. Hima Reddy Avatar

      Great question William! It’s all about right vs. obligation. With options, you have a “right” to buy or sell the underlying asset, but no obligation (ex if the price isn’t favorable). With futures, you must fulfill on it (obligation) if you still own the contract at expiration. ~Hima

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