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An agreement to buy or sell a fixed quantity of a commodity at a specific price on a specific date in the future is known as a commodity futures contract.
A position in the stock market can be protected or hedged using commodity futures. They can also be used to make directional bets on the underlying asset.
Investors frequently mix up futures and options contracts. The holder of a futures contract is required to take action.
The underlying asset must be purchased or sold at the stated price if the holder does not unwind the futures contract before it expires.
At their expiration date, the majority of commodities futures contracts are closed off or netted. Cash is used to settle the price difference between the opening and closing trades.
Speculators can utilize commodity futures contracts to make directional price bets on the price of the underlying product. Investors can take positions in either direction, meaning they can purchase or sell the commodity by buying (or going long).
Commodity futures employ significant leverage so that the investor need not contribute the full contract value. Instead, the broker managing the account must receive a portion of the overall deal value. Depending on the broker and the commodity, a different level of leverage may be required.
