Financial Services > Investments > Futures

 


This type of investment imposes an obligation upon the parties to buy or sell something on a given date at a fixed price.


Those rights can apply to specific commodities, currency or any security and so the capacity for incurring massive losses or generating a huge profit is considerable.

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For example, a farm may wish to have greater certainty when budgeting over the coming year and so they agree to sell their crop of barley on a given date for a fixed price. If their crop fails, contains too much moisture or is simply not ripe by the date in question because the weather has not been suitable, the farmer needs to buy the crop on the open market to deliver it for that fixed price to the agreed purchaser. The market price could be vastly different to the agreed delivery price and so the potential for things to go wrong is obvious.


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There are a variety of markets for trading futures around the world and this system runs parallel to and independent of the stock market.

In the UK financial futures are traded on London International Financial Futures and Options Exchange, shipping and agricultural products are dealt with through the Baltic Exchange, base metals are traded through the London Metal Exchange and the International Petroleum Exchange deals with oil.

It seems inappropriate to use the word 'investing' in association with futures because a range of uncertainties associated with this type of financial instrument seems more akin to gambling.

Profits and losses arising out of Futures are subject to Capital Gains Tax. Every UK tax payer is allowed to make gains of £11,300 in the 2017/2018 tax year before any Capital Gains Tax is payable. The tax is calculated by taking the total cost price away from the sale proceeds after expenses. Whatever is left is divided between the number of owners of the investment and each of them has their available Capital Gains Tax allowances to reduce the taxable element further.