If you are going to ask me as well as the other investors, among the most important advantages of engaging in trading futures are the aspects of standardization as well as liquidity. One of the reasons behind this is that these factors allow the futures contracts to be trader by both speculators as well as the end users freely. Aside from this, these aspects also provide for the healthy as well as more buoyant character of market for futures trading across the different types of assets that can be trader. In other words, both the aspects of standardization and liquidity make the futures market more fluid.
With the foregoing, it is very important to know the relevance of both the standardization and liquidity in futures trading. These will be explained in the sections hereunder.
On the one hand, standardization refers to the process wherein the futures contracts are in a standard form without room for any individual negotiation for the terms. This is a very important feature for futures trading as well as other tradable instruments because these make the transaction clearly defined. In other words, since the futures contract is clearly defined, this means that the package can be shifted from a trader to the other without the necessity for due diligence anymore. Consequently, only the subjects like the type of assets, quantity as well as specific date of delivery are subject or reconsiderations.
On the other hand, the other feature that is very important in futures trading is the concept of liquidity. In a general point of view, this refers to the ease on which the specific instrument can be bought or sold in the market. Aside from that, this can also be referred as the ease on which the said asset can be converted into cash.
For example, having cash in your bank account is as good as having a very liquid asset. This is because you can simply go to an ATM booth that is online all over the world, insert your card and then withdraw the money you need. In the said example, the processes that the owner needs to undergo between actually holding the asset and then holding the cash are minimal. In that instance, the asset is indeed very liquid since it can be readily changed into cash.
In contrary, if you will compare the above example with possessing a car, you cannot use such asset to instantly buy things. There are several processes to make it more liquid and be convertible into cash. Nevertheless, it can still be sold and then converted into cash eventually. For instance, you even have to look for a buyer like a bank or even an individual. It will even require you to post an advertisement for the potential buyer to see that you are selling your car.
With the foregoing, it is very important to know the relevance of both the standardization and liquidity in futures trading. These will be explained in the sections hereunder.
On the one hand, standardization refers to the process wherein the futures contracts are in a standard form without room for any individual negotiation for the terms. This is a very important feature for futures trading as well as other tradable instruments because these make the transaction clearly defined. In other words, since the futures contract is clearly defined, this means that the package can be shifted from a trader to the other without the necessity for due diligence anymore. Consequently, only the subjects like the type of assets, quantity as well as specific date of delivery are subject or reconsiderations.
On the other hand, the other feature that is very important in futures trading is the concept of liquidity. In a general point of view, this refers to the ease on which the specific instrument can be bought or sold in the market. Aside from that, this can also be referred as the ease on which the said asset can be converted into cash.
For example, having cash in your bank account is as good as having a very liquid asset. This is because you can simply go to an ATM booth that is online all over the world, insert your card and then withdraw the money you need. In the said example, the processes that the owner needs to undergo between actually holding the asset and then holding the cash are minimal. In that instance, the asset is indeed very liquid since it can be readily changed into cash.
In contrary, if you will compare the above example with possessing a car, you cannot use such asset to instantly buy things. There are several processes to make it more liquid and be convertible into cash. Nevertheless, it can still be sold and then converted into cash eventually. For instance, you even have to look for a buyer like a bank or even an individual. It will even require you to post an advertisement for the potential buyer to see that you are selling your car.
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