The definition of ‘spread’ can vary from as little as selling a few more units of a stock to making a massive profit from quickly buying and selling investments. While there are clear definitions for ‘futures’ meaning future contracts on currencies, metals, and commodities, there isn’t a strict rule book for the rest. That makes it easier for unscrupulous people to take advantage of naive investors. Don’t let that happen to you! Let’s take a quick look at what constitutes ‘spread’ in the financial markets and how you can stay one step ahead of the game.
The Difference Between ‘Futures’ and ‘Spreads’
In the world of investing, there are two types of products that have very similar names but are actually quite different. The first is ‘futures’, which we’ve already mentioned. These are often used when referring to the price movement of some commodity or currency in the future. For example, we might speak of the sugar futures market or the gold futures market. What these contracts are really saying is that at some point in the future, I as an investor agree to buy/sell something at a certain price. So if you’re looking to make a long-term profit from the price movement of certain commodities, then you can actually take an active role in the market by buying or selling these contracts. There are many different types of futures contracts, some of which are extremely complicated, so it’s important to do some research before getting involved.
However, there is also another type of investment product that is known as a ‘spread’. These are generally used to describe the difference between the price at which one buys and sells the same commodity or currency. For instance, if I buy a coffee bean for $10 and it’s currently trading at $12, that would be a $2 spread. We could also have a $5 spread if the coffee bean is currently trading at $7 and I want to sell it for $10. Spreads can be useful for identifying areas of opportunity within the markets, but you have to be careful because there really is no such thing as a free lunch. You always have to pay for that coffee somehow. So if you’re looking for a way to make easy money investing, then consider looking into the lucrative world of spread betting instead.
How To Spot The Difference
There are several key differences between a futures contract and a spread. First, a futures contract is only valid and can be enforced if the commodity or currency is actually traded on a market. If there isn’t a market in the commodities that you’re trading in, then your contract is simply that – nothing more, nothing less. Second, the contract price for a futures contract is always ‘settled’, or guaranteed, by the exchange on which it’s traded. Third, the contract size for a futures contract is generally ‘fixed’. This means that either you buy or sell a fixed amount of the commodity or currency at the specified time and price. Finally, as we’ve already mentioned, spreads are usually used to indicate the difference between the price at which something is bought and sold. This is also referred to as the ‘spread between the bid and the ask’ or the ‘price difference’.
If you’re looking to enter the world of investing for the first time, then you might wonder what the difference between all these different types of investments is. Let’s take a quick look at how to spot the difference between the two.
Futures Are Very Enforced Contracts
Futures contracts are generally very strict and have highly specified delivery requirements. If you don’t meet these requirements, then your contract isn’t really worth the paper it’s written on. This is all part of the reason why they are used when referring to the price movement of some commodity or currency in the future. The other reason is that if the commodity or currency being referenced by a futures contract does not exist, or is not traded at a market, then your contract is simply meaningless. It’s like trying to bake a cake without any eggs or milk! So, to stay out of trouble, be sure to do some research before getting involved.
Futures Contracts Are Enforceable
Even though they aren’t very reliable as a means of predicting the future price movement of some commodity or currency, futures contracts are extremely useful for ensuring the delivery of some material at a future date. This is why they are used when referring to something that is going to happen in the future. If you are in agreement with the terms of a futures contract and the other party to the contract agrees that the material will be delivered at the specified time and price, then you can actually enforce that contract. However, this is rarely the case, so you have to be careful when entering into a futures contract.
Now that you know the basics of what a futures contract is, how it’s different from other kinds of investments, and how to spot the difference, let’s move on to the next topic.