The forward market is a personalized method of trading futures contracts, where contracts are individualized to the parties involved and never sold to other holders. It differs from futures trading, which is standardized and sold through an exchange. The goal of futures contracts is to anticipate changes in the market to buy or sell an asset at a beneficial exchange.
The forward market is an over-the-counter method of trading specialized futures contracts. While the forward market has a lot in common with futures trading, the goal and feel of the market are very different. In most cases, forward contracts are individualized to the parties involved and are never sold to other holders. Traders usually sit down and work out the individual details of the contract rather than using basic agreements. Since the process is often face-to-face and personalized to the parties, it is common for the buyer and the seller to know each other.
In the investment world, a future is an agreement to do something in the future. In many cases, these contracts are the equivalent of buying or selling an asset on a specified date for a specified amount. Once the future is charted, it can be bought and sold like any other asset. As long as the future does not expire, the actual holder is rarely important.
The investor’s objective in a futures contract is to anticipate changes in the market in order to buy or sell an asset at a beneficial exchange. For example, a stock sells for $50 US Dollars (USD) at the time the future is sold. The contract states that within six months, the holder has the option to purchase those shares at the price of $50 USD. The buyer expects the stock price to rise and the seller is selling the option to raise immediate money against possible future money loss. If the share price rises to $75 USD, then the future holder can exercise his option and buy the cheap stock for an immediate profit of $25 USD.
A forward market contract is almost identical to a future from an investment standpoint. The only definite difference is in the sold method. A future is sold through an exchange, a dedicated platform for buying and selling assets. Forwards are sold over the counter, which means that the issuer sells them directly to someone else. While this seems like a small difference, it is important in this case.
In the futures market, contracts are usually standardized forms with information related to the completed sale. In the forward market, the buyer and seller typically work together to create a single contract that will be beneficial to both parties. Since the agreement is often more complex and two-sided than a future, a futures market contract rarely results in default or expiration. Finally, the contract often stipulates that the future cannot be sold to another party.
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