Future Contract: significance & scope

07 Dec 2021|

1 min read |

by ICICI Securities Team

Introduction

The Future Contract, recently, has become a popular trading instrument with retail investors.Such a contract is a binding agreement through that the buyer and seller agree to purchase/sell a commodity at a fixed price on a pre-decided date in the future. Traders like entering such contracts as they can safeguard their interests against price volatility.

Commodity Futures is also Futures Contract where the buyer or seller agrees to buy or sell a commodity at a fixed price in the future. The commodity for such contracts comes under four categories: metals, livestock, agriculture, and energy.

What are its benefits?

The Future Contract is attractive to traders for the following reasons:

They get traded on organised exchanges, which provides a ready, liquid market. Like in the stock market, the Future Contract in commodities are bought and sold anytime on designated bourses. This is in contrast with Forward Contracts that get traded Over-The-Counter.

The volume of the underlying asset of a Future Contract that gets traded is standardised by the exchange. You need not negotiate between the buyer and seller. Moreover, the minimum price movement size is also specified by the exchange. The limit on the maximum price change within a day gets imposed by exchange. Separately, both quality and quantity in a single contract get standardised by the exchange.

A single clearing house is responsible for executing all the Future Contract and acts as the counterparty for every buyer and seller. If the trader is a buyer, then the clearing house acts as the seller. If the trader is a seller, the clearing house acts as the buyer. This minimises the default risk to a great extent.

The Commodity Futures help give necessary diversification to your portfolio. Commodity prices are controlled by supply-demand dynamics, geopolitical forces, natural disasters and weather conditions. As a result, commodities function as an independent asset class.

For an importer or an exporter, Commodity Futureshelps safeguard their interests against price fluctuations. You can procure or sell commodities at a pre-decided price before the actual transaction takes place. This ensures that you do not get impacted by any price changes that happen at a later date.

Scope for profits

Like in other trades and investments, there is no guarantee of profit in the Future Contract in stocks or Commodity Futures. Profit depends on how accurately you predict the price movement in the market and your risk appetite. Typically, traders engage in multiple transactions in a single trade to increase their profit.

If you have a low-risk appetite, the Future Contract is not your cup of tea, as even a single trade ruins your chances of making profits. However, since it is a high risk-high reward segment, doing sufficient homework and having a solid strategy helps. Open your Trading Account to start trading in Future Contract.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

ICICI Securities Ltd. is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. ICICI Securities Ltd. is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Atul Agrawal, Contact number: 022-69997051, E-mail address: complianceofficer@icicisecurities.com Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. ICICI Securities Ltd. and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. ICICI Securities Ltd. acts as a Composite Corporate agent having registration number -CA0113. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund, Corporate Fixed Deposits, Bonds, Alternate investment funds, Tax planning, Succession planning, NPS, IPO, Investment Advisory and Loans related services are not Exchange traded products and ICICI Securities Ltd. is acting as a distributor to solicit these products. Please note, Insurance related services are not Exchange traded products and ICICI Securities Ltd. is acting as a corporate agent to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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