Are there Risks with Buying Futures?

Answer:
Yes. Buying futures is a risky investment strategy

that can yield extremely large gains and equally large losses. This is because of how buying futures works. When you buy futures, you are buying a contract to buy something such as a commodity, stock index, or financial instrument in the future at a price agreed upon today. When the date arrives, you must buy the agreed upon commodity at the price you agreed upon earlier. You win if the market value has risen because you are able to buy it at the lower price. You can then sell the commodity at a profit.

However, if the market value has fallen, you are obligated by the futures contract to buy at the higher price. You are now paying more than the investment is worth. If you sell the investment, you will have to sell it at a loss.

For example, if you think a particular investment will rise in the future, you might buy a futures contract to buy $100 shares at $10 per share in three months. When the date comes, you must buy $100 shares at the agreed upon $10 per share price regardless of the investment’s current value. If the price has gone up to $20 per share, you will have purchased $2000 worth of the investment for just $1000. If the price has fallen to $5 per share, you will have paid $1000 for an investment that is only worth $500.


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