No matter how profitable and attractive a trading instrument is if chosen as the main asset, traders will soon want to diversify their portfolios. And this is absolutely ok! Diversification of investment portfolio* makes the process of trading more inspiring and successful. Today, we invite you to find out more about an instrument with high-profit potential that deserves your attention when diversifying a portfolio. We are talking about futures contracts, or futures.

*Diversification of investment portfolio is the process of investing funds in various assets in order to minimize total risks.

Understanding futures contract

Futures are specially created exchange contracts that imply an agreement to buy or sell an asset at a specific market price at a certain date in the future. The underlying asset can be precious metals, oil, gas, securities, stock indices, commodities, as well as currencies and bonds. The exchange acts as an intermediary between sellers and buyers.

Notably, futures contracts can hardly be called a novelty as they have been used in agricultural trade since ancient times. Historically, there was a verbal agreement between the European and American markets that determined conditions for buyers and suppliers of a commodity.

Let’s say, a farmer sows wheat in the spring. At this time, he agrees with a potential customer to sell 1 ton of wheat at the current price of $100. The price can be higher (lower) than the current market price or equal to it. The main thing is that both the buyer and the seller should agree on it. Based on popular weather wisdom, the farmer believes that there is a warm summer ahead which means an abundant harvest in the autumn. If these beliefs are true, there will be an oversupply of wheat in the market which may lead to a decline in prices. However, a hardworking farmer does not want to sell his wheat at just $30-$50 per ton. This is why he agrees with several potential buyers beforehand to sell them wheat at the current price of $100. In this case, the futures contract serves as protection of the seller’s interests and fixes the cost of wheat that will be delivered only in the autumn.

Therefore, the futures contract enables sellers to plan the delivery of their commodity and buyers – to secure a good price.

Types of futures

There are two types of futures contracts: deliverable and non-deliverable, or cash-settled.

A deliverable futures contract implies the delivery of the underlying asset. For example, the two parties agreed to deliver wheat at the current price in six months from now. This means that at the date the futures expires, the buyer is obliged to purchase the asset while the seller is supposed to sell the specified amount of the commodity.

When trading cash-settled futures, no delivery is required. In this case, the seller and the buyer settle the difference in cash that results from the contract price of the non-deliverable futures and the actual price of the asset at the date the futures expires.

Most of the time, traders aim to gain profit from speculating on futures contracts rather than to purchase a real commodity. Stock index futures, security futures, and currency futures are traditionally the most popular instruments among investors.

Novice traders often confuse the two notions: “the price of the futures contract” and “the price of the underlying asset.” These are different values although they are connected. Thus, the futures price means the current price of the contract. Oftentimes, this value is lower or higher than the price of an underlying asset.

5 advantages of trading InstaFutures

To avoid such confusion, it is important to find a reliable broker who will assist you in understanding the principles of futures trading. By the way, some brokerage firms have attractive futures instruments to offer. Thus, InstaForex provides its clients with a great opportunity to trade Finance InstaFutures against other traders.

Whether you are a professional trader or just making your first steps in this journey, you will easily learn how to trade InstaFutures online through a popular MT4 trading platform.

The InstaForex platform also features Trader’s Calculator with the help of which you can define the value of the contract as well as other important trading parameters. Here, you will also find information on leverage and indicators that show asset performance.

It will take you only 3 minutes to register a trading account with InstaForex from any device you like. Get an opportunity to access unlimited futures trading!

Conclusion

Futures contract trading enables you to access a wide variety of trading instruments. Moreover, this is a great way to diversify your portfolio with minimal risks of losses. Another advantage of the futures market is its high liquidity which is why many traders worldwide prefer this instrument.