Futures trading is one of the most popular forms of investing, and for a good reason. Futures offer investors a way to speculate on the future price movements of various assets, including commodities, stocks, indexes, and currencies.
However, before you start trading futures, it’s essential to understand the different types of futures contracts that are available. This article will look at the four most common types of futures contracts and how they work.
Commodity futures
A commodity future is a contract to buy or sell a specific quantity of a commodity at a specified price on a specified date in the future. Commodity futures are traded on commodities exchanges worldwide, such as the Chicago Mercantile Exchange (CME).
The most popular commodity futures include contracts for crude oil, gold, silver, corn, and soybeans. When you trade a commodity future, you’re speculating on the future price of the underlying commodity. If you think the price of crude oil will go up, you will buy a futures contract.
If you’re correct and crude oil prices go up, you will be able to take advantage of your trade. If you’re wrong and the price of crude oil goes down, you will incur a loss.
Stock index futures
A stock index future is a contract to buy or sell a specific quantity of a stock index at a specified price on a specified date. Stock index futures are traded on stock exchanges around the world, such as the New York Stock Exchange (NYSE).
The most popular stock index futures include contracts for the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq 100. When you trade a stock index future, you’re speculating on the future price movements of the underlying stock index.
If you think the S&P 500 will go up, you will buy an S&P 500 futures contract. If you’re correct and the S&P 500 does go up, you would be able to find new opportunities regarding your trade. However, you would incur a loss if you’re wrong and the S&P 500 goes down.
Currency futures
A currency future is a contract to buy or sell a specific quantity of a currency at a specified price on a specified date. Currency futures are traded on commodities exchanges worldwide, such as the CME.
The most popular currency futures include contracts for the U.S. dollar, Japanese yen, British pound, and Swiss franc. When you trade a currency future, you’re speculating on the future price movements of the underlying currency.
If you think the value of the U.S. dollar will go up against the Japanese yen in the future, you will buy a USD/JPY currency. If you’re correct and the USD goes up against the JPY, you would profit from your trade. You would incur a loss if you’re wrong and the USD goes down against the JPY.
Interest rate futures:
An interest rate future is a contract to buy or sell a specific quantity of interest-bearing security at a specified price on a specified date in the future. Interest rate futures, such as the CME, are traded on commodities exchanges worldwide.
The most popular interest rate futures include contracts for U.S. Treasury securities, Eurodollar deposits, and federal funds. When you trade an interest rate future, you’re speculating on the future price movements of the underlying security.
If you think the value of U.S. Treasury securities will go up, you will buy a T-bond futures contract. If you’re correct and the value of T-bonds increases, you may be able to take advantage of the price increase. If you’re wrong and the value of T-bonds decreases, you will incur a loss.
In summary
With that said, there are four main types of futures contracts: commodity, stock index, currency, and interest rate. Each type of contract has its unique characteristics and risks.
When trading futures with Saxo, it’s essential to understand the difference between the various types of contracts. This will help you decide which contracts are suitable for your investment objectives.
