If you are like most people, watching the financial news can sometimes feel like listening to a foreign language. It sounds like English but then again, it is not. One of the more common financial instruments that you are likely to see on any financial report is futures. Futures are a type of derivatives used to buy gold and silver.
To make it quite easy to understand you need to know two dates. The date when you actually buy the futures contract, which for the purpose of this article we will call today. The second date that you need to remember is what we are going to call the future.
In futures, you buy the gold at terms and prices determined today. The price at which you buy the gold is the current price today. However, you are not required to pay up immediately. You are required to pay on the second date, which we called the future. Typically, the future is three months from today. That future date is also known as the settlement day.
As you likely know, a lot can happen in the three months between today and the settlement day. The price of gold can move in any direction, up or down. If for example you buy gold today at a spot price of let’s say US$ 1,100 an ounce, and the price goes up to US$ 1,250 next week, and then slumps to US$ 1,200 all before the settlement day, you’ll definitely want to cash in on the opportunities before the price slumps. That is what a gold futures contract enables you do. In this case, we are discussing only on gold but if you would like to buy and sell gold and silver BuyAndSellGoldSilver.com will be of great help.
Futures and Margins
Sometimes the trade can be quite good, and you could decide that you want to delay the settlement day a little more. The trade will keep the adrenalin flowing as you see how much more you could get. It will also keep the seller’s adrenalin flowing since from experience he would know that the price could also slump at any time.
In order to protect himself from that, a seller in a gold futures contract would ask you to pay some money, just in case the price falls and you decide to cut your losses and run. The money you pay in such a case is what is called a margin.
Margins can be anything between 2-30% of the value of the futures contract. If the price starts falling, the dealer would ask you to increase your margin. The only way to get out of paying more margin would be to sell. Understanding margins is key to understanding how a savvy gold investor like yourself can take advantage of yet another key feature of gold trade, and that is what is called a leverage. The fourth part of this series will describe how you can use leverages to buy gold and trade in gold futures.