Futures markets or popularly known as the futures contract, in their most basic understandable form, are markets in which commodities are traded as financial products. As the name suggests, such type of stocks is delivered or purchased at a certain time in the future according to the agreed bought and sold phase.
Futures Contract Explained
A futures contract happens between a buyer and a seller. It is a basic arrangement in the form of unit of exchange traded in the futures markets. Futures cane be bought in your regular trading apps. Each contract is determined based on the set quantity of some commodity or financial holding or asset so it can only be traded in multiples of that particular amount. For transparency among traders, a futures contract is a legal agreement that offers provision for the delivery of variety of commodities or financial holding or assets at a specific or pre-scheduled time period in the future.
Trading in Futures Contract
When you start trading i.e. buy or sell a futures contract, you don’t actually sign a legal binding up prepared by a lawyer. Instead, you mutually agree to enter into a contractual obligation then it can be only realised in either of the events; buy or sell. The first approach is done by taking delivery of the actual commodity. There is no set rule however exceptions are seen depending on the parties involved.
Hardly 1% of all the futures contracts made at a given time are realised with an actual delivery. The flip side to meet the condition of this contract, is the strategy you will be using, usually as the offset. For traders, offset is nothing but making the opposite choice (or offsetting) sale or purchase of the same contracts bought or sold sometime prior to the delivery date of the contract. Because futures contracts are usually standardised, this is executed easily.
Future Contract Margins
There are two types of margin: first level initial margin and operative maintenance margin. You will find more detailed explanation about margin calls in online trading course.
Initial margin is the deposit that must be in your trading account before you start trading. If you do not have adequate initial margin amount in your account, you have to incur a margin call. Most brokerage firms specifically ask to have initial margin amount to be in the account before you are allowed to place a trade.
In some cases, brokers might issue credit amount for regular traders, but the credit period has notice of 1 or 2 days that too when the amount is too small. All brokerage firms have a right to ask you to deposit amount same day through online transaction in your linked bank account. This is more stringently followed during sharp rise or decline in stock prices and frequent fluctuations seen throughout day.
Maintenance margin is the minimum deposit amount that must be mandatorily maintained in your trading account as long as your position is active. If the security balance in your trading account falls below the margin level, and you fail to maintain it because of sudden drop in market, you have to incur a margin call for it. After you are alerted for the margin call, you have to abide by the call and deposit money to liquidate your position. If you again fail to meet a margin call alert in a time frame, the broker has all rights to use your position and liquidate it for you.