What are the Mechanics of a Futures Trade?
With a futures contract, the underlying merchandise is known. For example, an investor can buy a futures contract on gold, lumber, pork bellies, swiss francs, and many other items. The underlying item or commodity is described specifically in the contract specifications which are determined by the futures exchange on which it trades. The price of a futures transaction is agreed upon initially between the buyer and seller, and remains fixed over the holding period, or length of the contract. Each participant in a futures contract is required to open a futures account for depositing margin. Margin is money deposited by both the buyer and the seller to assure the integrity of the contract. Finally, the full price of the commodity must be paid only upon contract expiration at which point the trader takes delivery, if the trader bought futures, or make delivery, if he sold futures, of the underlying commodity. Transactions in futures can only be done on futures exchanges. These exchanges are located primarily in Chicago and New York.