7. What is Futures Trading? How to Trade in Future Contracts?

Futures Trading Definition:

Unlike stock market traders, futures traders get the benefit to trade using only part of the capital which is entitled as “risk capital”. While futures trading can be used to effectively hedge other investment positions, they can also be used for speculation. Doing so carries the potential for large rewards due to leverage (which will be discussed in greater detail later) but also carries commensurately outsized risks. Before beginning to trade futures, you should not only prepare as much as possible, but also make absolutely certain that you are able and willing to accept any financial losses you might incur.

 Olden days when farmer growing cotton, wheat, etc come to sell his product turn out to be dealer as well. Contracts are drawn up between the dealer and buyer agreeing to deliver specific product at specific amount at specific date. For example: 1 tonne of cotton to be delivered after two month at Rs.50,000/-  From here futures trading started. Now a day’s system has been made legalised in order to assure both the parties at a specified date. Apart from future commodities trading now we have other financial instruments also been traded in similar fashion.

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