Define Futures Trading

Gold is one asset traded in the futures markets.

Futures trading is generally similar to other forms of financial trading, but there are some distinguishing features that are unique to the futures markets. Futures markets cover a wide range of assets including metals, grains and currencies.

Definition

Futures trading is the exchange of futures contracts between buyers and sellers in a regulated marketplace. When a futures contract is traded, the buyer agrees to buy some underlying asset at a set price on a future date and the seller agrees to sell that asset. It is important to note that buyers and sellers can offset their respective obligations by closing out their position before the expiration date of the futures contract.

Trading Mechanics

In futures trading, buyers and sellers are matched up via a centralized exchange. All trading accounts are market to market at the end of each day, meaning that profits and losses are credited and debited to accounts on a daily basis.

Leverage

One of the defining characteristics of futures trading is the potential for leverage. This means that a futures trader can control a futures contract for a fraction of its full value. The amount of money a futures trader must have to trade a given futures contract is called the margin. For example, the margin required to trade a gold futures contract is only $5,739, but assuming a value of $1,200 per ounce, one gold futures contract represents $120,000 worth of gold.

References

• CME Group: Gold Futures
• CME Group: Performance Bond/Margin Rates