Futures contract facts for kids
A futures contract is like a special promise between two people or groups. One person agrees to buy something, and the other agrees to sell it. They decide on the price today, but the actual trade happens later, on a specific future date.
These contracts are traded on special marketplaces called futures exchanges. The "things" being traded are called commodities. These can be farm products like livestock (animals) or apples. They can also be metals like gold, or energy like oil. Even financial items can be traded this way.
People hope to make money from these contracts. But trading futures is also quite tricky and very risky. Instead of making money, you could lose all the money you put in. Sometimes, you might even have to pay more than you first invested.
How Futures Contracts Work
A futures contract helps both buyers and sellers plan for the future. For example, a farmer might want to know how much money they will get for their crops. A company might want to know how much they will pay for oil in a few months.
Why People Use Them
People use futures contracts for two main reasons:
- Managing risk: A farmer can sell their future crops at a set price now. This way, they know how much money they will earn. They don't have to worry if prices drop later.
- Hoping to make money: Some people buy or sell futures because they think the price of the commodity will change. They hope to buy low and sell high, or sell high and buy back low.
An Apple Example
Let's look at an example to make it clearer:
- Sam owns an apple orchard. He needs money now to pay for workers and fertilizer.
- Bob loves apples and wants to make sure he gets some after the harvest.
- Bob offers to pay Sam $20 today. In return, Sam promises to give Bob two bushels of apples after the harvest.
- Now, Bob has two "futures of apples." Sam has the money he needs, and Bob knows he will get his apples later at a set price.
Images for kids
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Changes in US futures
