It makes sense to thoroughly understand the complete process of an investment irrespective of the type of tool you choose for investing. Not only does it minimize the chances of any major gaffe being committed, it also prepares you for any adverse situation that can develop in any investment medium. This applies more particularly to investment in futures contracts.

Delivery type futures contract stipulate the type of commodity to be delivered, whereas trading in currency futures provide for delivery of a specific number of foreign currency. Futures contracts that require the trade to be settled in cash rather than delivery are based on a specific index by which the dollar is multiplied. It is therefore very important to know the type of product you will be trading in and the specific quantities that will be involved in the trade.

Prices in the futures market are quoted in the same way as in a cash market. However, in cash settlement, contract prices are quoted in terms of a specific index number. It is therefore necessary to clearly understand the price quotation system for that particular futures that you are trading in, in order to avoid confusion while making settlements.

Trading exchanges determine the minimum amount by which the price of a particular product can fluctuate on both the upper and lower levels. This is popularly known as the tick. The ‘tick’ for a grain futures is different than that for a gold futures. While trading in futures, you must familiarize yourself with the price fluctuation for the product that you are trading in. It is also important to know how the fluctuation on a single unit will affect the value of the entire contract.

Similar to ticks, stock exchanges also establish daily price limits for trading in futures contract. They are based on the previous day’s closing with an additional unit added or subtracted per trading unit to arrive at that day’s price range for trading. Once the price limit for trading on that particular day is reached, there can be no more trading at a higher price until the next day. The converse is true for the lower end of the price range. However, daily price limits are eliminated for the month in which the contract is supposed to expire.

Futures trading is therefore a complex task and one must be very familiar with the procedures and rules of trading before actually participating in the trading process.