Everything You Need To Know About ‘Gold Futures’
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If you have been involved in the stock market (or in the financial sector for that matter), you must know that the market can fluctuate at any time.
One moment, the economy would be rapidly growing and the next thing you know, it all comes crashing down. The 2008 financial crisis is a good example of that. However, where there is risk, there’s also opportunity.
Although we will be specifically talking about gold futures but, the basic concept of a future contract is the same for all commodities.
A gold future allows you to purchase gold in the future at today’s price. To better understand this let’s look at the following example; suppose the current gold prices are $100. However, you know that in three months the prices will go up to $110.
You enter a future contract, which states that you will purchase gold three months later at today’s price ($100). Three months later the prices do go up however, you will be able to purchase gold at $100. This will allow you to make a profit of $10.
Some people tend to delay settlement of the contract because they are unsure if gold prices will really increase in the future. This can be a problem for all the parties involved.
Therefore, in order to counter this problem, both parties deposit a margin with a third party. It’s rate fluctuates and can be anything between 20-80%.
Over the Counter Futures
Over The Counter Future Contracts are quite different from normal future contracts since they are customizable. Not only that, they are liquid and can be quickly converted into cash in case the need arises.
In addition to that, there’s no chance of a default since the clearer is responsible for handling all the payments like margin.
Up until now, we have mentioned how trading with futures can be profitable but there’s a flip side to it as well. There have been cases in the past when people have misjudged the market and ended up facing huge losses.
Even if you do get back the amount you invested, you will lose the margin. If you had not paid the margin, you will lose your entire amount.
Another thing you want to know about futures is that at the end of the day they are derivative instruments. Majority of the payments are done on credit basis because of which they are also quite risky.
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