A Futures Trade put simply it is an
agreement between a buyer and seller of a specific quantity and
quality of an asset for a future date but with the price of that
asset agreed at the point of the contract being made.
Let's look at an example of how someone may trade on the price
of gold (traded on an exchange called the CME or Chicago
Mercantile Exchange). The price of gold has risen very rapidly in
the last few months and many traders have been able to take
advantage of these price increases by using futures contracts.
If we go back to our earlier explanation of futures trading we
need 5 different elements for us to be able to successfully place a
trade on the price of gold. There needs to a buyer and a seller, a
quantity and quality of the asset (gold), a date in the future the
buyer and seller want to trade for and a price that they are happy
to trade at.
Buyers and sellers of futures contracts can be found at a
futures exchange and in this instance the CME is where we can trade
gold. Access to this, and other exchanges, is provided by a
number of direct market access trading platforms (we will look at
these later).
The quantity and quality of the asset is set by the CME and in
this example the gold contract is for 100 troy ounces of the
precious metal (this is also known as 1 'lot') that will be a
minimum quality of 955 fineness.
A date in the future is now required and the CME provides
traders with a number of settlement dates; February, April, June,
August, October and December.
The last, and probably most important, part of the contract is
the price. This is the price that the buyer and seller agree to
trade at.
Once the buyer and seller agree all of these elements a contract
between the two is created by the exchange. From this moment if the
price of the gold contract rises in value from the agreed price it
is the buyer who will profit, if the price of gold falls in value
it is the seller who will gain.