Anonymous asked:
Sure! So a future is a contract to exchange an asset at a specific future date. So if I sell you a June gold future, I am agreeing to deliver 100 troy ounces of gold to you in June. And by buying a June gold future from me, you are paying for the right to have that gold delivered to you in June.
Of course, if you are an average trader who just wants to invest in gold, you probably don’t want to deal with having actual gold delivered to you in June and figuring out how to store it and stuff. So you will want to “roll” your futures: when the delivery date gets close, you can sell your futures and buy futures for a few months later, so you never actually get gold delivered to you.
A big reason people use futures is to hedge. If you’re a wheat farmer, you might be worried that if the price of wheat drops a lot this year, you won’t make enough money to plant next year’s crop. So you sell some wheat futures to insulate yourself from risk.
I’ve talked about commodity futures so far, but futures don’t have to involve delivery of physical objects. You can also buy things like S&P 500 futures. These are cash settled, meaning that instead of the person who sold you the future physically delivering something to you, they will just pay you cash. In the case of S&P 500 futures, they will pay you the value of the S&P 500 index at the time of settlement: if the index is at 2090, they will pay you $2090.
I don’t know of a good stock market FAQ or similar; usually if there’s something I don’t understand I’ll look it up on Investopedia or something.