The similarities first:
Are you someone who has recently ventured into the stock market? If your answer is a yes then we can imagine how you must be tangled in a jargonistic lingo. The problem with the shares and the stock markets is not so much the speculation because the nature of trading in the stock market itself is that but what can be unnerving to most people who are newly venturing or have spent a small time here is that they are confused with the technical lingo that the brokers and other people in the fraternity speak.
The confusion is real:
Take for instance the case of my friend Allen. At 29 years, Allen decided that his professional life was getting dull and boring and that he was looking for some exciting new breakthrough. He had a couple of friends who were traders in the stock market and he thought that both of them were having a great and interesting career graph.
Well, to cut the long story short, he ventured just like that and without much preparation. What was more? He had a tough time understanding what his seniors and colleagues told him. In the beginning he was lost among jargons but slowly with passage of time he did become relatively smarter. Thanks in big part to what he learnt on the Infinity app.
On one particular instance he was hysterical when he had to deliberate on the differences between the futures contract and the forward contract. This friend of mine thought both the contracts were one and the same. Thank God that he came over to see me before he was going on a customer call and I told him the differences.
Just imagine the funny figure he would cut if he had bluffed something into the answer. Here are the three basic differences between the two contracts:
Nature of the agreement:
Futures contract are standard contracts by virtue of the fact that they are traded at the stock exchange. Because they are set contracts there is very less flexibility in the terms and conditions of the contract.
A forwards contract on the other hand is privately agreed upon and because they are done at the instance of the parties the agreement has scope for a lot of flexibilities in its terms and conditions.
The counterparty risk:
The counterparty risk is the risk that one of the parties may default. The chance of default in a futures contract is lesser than in a forwards contract because there is no mechanism in place to offset such risks.
The date of settlement:
In a forward contract the specific performance of the contract is always slated to be at the end of the contract period. The futures contract has settlement over a couple of days and sometimes even more. The forward contract thus always has only one forward trade while the futures may have a lot of dates.
The futures contract is very popular with speculators and the hedgers are mostly interested in the forward one.