Contract trade is a term that refers to a type of trade that involves the buying and selling of a contract between two parties. The contract can be for any asset, such as stocks, commodities, or currency. The contract represents an agreement between the two parties to buy or sell the underlying asset at a specified price and time.
Contract trading is also known as futures trading. In futures trading, the buyer and seller agree to buy or sell the asset at a future date, which is typically a few months from the date of the agreement. The price of the contract is determined at the time of the agreement, based on the current market price of the underlying asset.
Why is contract trading important?
Contract trading is an important aspect of the financial markets because it allows investors to hedge their risks. For example, a farmer who grows rice can use futures trading to lock in a price for his crop before it is harvested. If the market price of rice falls before his crop is harvested, the farmer will still receive the price that he locked in through the futures contract.
Similarly, investors who own stocks can use futures trading to hedge against market volatility. For example, if an investor owns a portfolio of stocks and is worried about a market downturn, he can sell futures contracts on the stocks in his portfolio. If the market does indeed decline, the investor will make money on the futures contracts, which will offset the losses on his stock portfolio.
How does contract trading work?
Contract trading is conducted through futures exchanges, which are organized marketplaces where buyers and sellers can trade contracts. The two most important futures exchanges in the United States are the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). These exchanges trade futures contracts on a wide variety of assets, including commodities, stocks, and currencies.
When a buyer and seller agree to a futures contract, they must put up a margin payment, which is a small percentage of the total contract value. This margin payment serves as a guarantee that the buyer and seller will fulfill their obligations under the contract. If the price of the underlying asset moves against the buyer, he may be required to put up additional margin payments to maintain his position.
Conclusion
Contract trading is an important aspect of the financial markets, allowing investors to hedge their risks and providing liquidity to the market. It involves the buying and selling of futures contracts, which represent an agreement to buy or sell an underlying asset at a specified price and time. Futures trading is conducted through organized exchanges, such as the CME and CBOT, and requires a margin payment as a guarantee of the buyer and seller`s obligations under the contract.