Terminal.Contract_, Tutorials

Futures contract tutorial

If you are looking for a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge, gold and silver futures contracts can be a viable way to meet your needs. In this article, we'll cover the basics of gold and silver futures contracts and how they are traded. But be forewarned: Trading in this market involves substantial risks, and investors could lose more than they originally invested.

Tutorial: Futures Fundamentals
What Are Precious Metals Futures Contracts?
A precious metals futures contract is a legally binding agreement for delivery of gold or silver in the future at an agreed-upon price. The contracts are standardized by a futures exchange as to quantity, quality, time and place of delivery. Only the price is variable. (For more insight, see the tutorial.)

Hedgers use these contracts as a way to manage their price risk on an expected purchase or sale of the physical metal. They also provide speculators with an opportunity to participate in the markets without any physical backing.

There are two different positions that can be taken: A long (buy) position is an obligation to accept delivery of the physical metal, while a short (sell) position is the obligation to make delivery. The great majority of futures contracts are offset prior to the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.

Advantages of Futures Contracts
Because they trade at centralized exchanges, trading futures contracts offers more financial leverage, flexibility and financial integrity than trading the commodities themselves. (For related reading, check out .)

Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with performance margin. It requires considerably less capital than the physical market. The leverage provides speculators a higher risk/higher return investment. (For related reading, see .)

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