A contract is a legally binding agreement between two parties to buy or sell an underlying asset or financial instrument, such as a commodity, stock, or currency. Contracts are commonly used in derivatives trading, such as futures and options.
Each contract specifies the terms and conditions of the trade, such as the delivery date, the asset price and quantity, and other relevant details. They can be standardised or customised based on a trader’s preferences, and they can be traded on exchanges or over-the-counter (OTC) markets.
Below are some of the most common types of contracts in trading and investing:
Futures contracts: A futures contract is an agreement to buy or sell a particular asset at a predetermined price on a predetermined date. It is bought and sold on an exchange and frequently used on commodities and indices.
Options contracts: An options contract is an agreement that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on a predetermined date. It is frequently used to speculate on price movements and hedge against losses.
Forward contracts: A forward contract is a privately negotiated agreement between its buyer and seller to buy or sell a particular asset at a predetermined price on a predetermined date. It is commonly used in the forex market.
Contracts for Differences (CFDs): A Contract for Difference (CFD) is an agreement between its buyer and seller to exchange the difference between the opening and closing price of the contract. CFD traders can speculate on price movements of various financial instruments without owning them.
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