Futures Trading is an investment option where an investor speculates about the price of the commodity or service going up or down in the Future. Futures trading as the name indicated is a trading for Future.
What is a Futures Contract?
According
to Answers.com “A contractual agreement, generally made on the trading
floor of a futures exchange, to buy or sell a particular commodity or
financial instrument at a pre-determined price in the future.Futures
contracts detail the quality and quantity of the underlying asset; they
are standardized to facilitate trading on a futures exchange. Some
futures contracts may call for physical delivery of the asset, while
others are settled in cash.”
According to Wikipedia “Futures contract,
in finance, refers to a standardized contract to buy or sell a
specified commodity of standardized quality at a certain date in the
future, at a market determined price (the futures price). The contracts are traded on a futures exchange”
Like
every contracts Futures also have Expiry date. But you are not required
to hold the futures till the expiry date. You can sell or cancel them
anytime.
Futures Speculations.
In a futures market we speculate on
Commodities like corn, oil, lumber, cotton, steel, sugaretc. Governments from time to time stop the trading of a certain commodity to arrest the price rise.
Gold is another commodity people speculate on. In fact Gold and silver is the most important and widely traded item in a futures exchange.
Currency is among the favorites. People speculate on the rise and fall of a foreign exchange.
In a futures market we also have speculation going on about Securities and Financial Instruments.
We also have Speculation going on about the rise and fall of intangible assets or referenced items such as stock indexes and interest rates.
Advantages of Futures Trading
Future trading is a great opportunity as far as the Farmer is concerned. Before the futures, a farmer is at the mercy of the middle man who would do every trick in the book to reduce the price of the commodity at the time of harvest. Now with Futures a Farmer can future sell a product when the price is high in the market before the actual harvest. It hedges him against the possible fall in the price of the commodity at the time of Harvest.
Futures are high leveraged investments. You only require apart of the contract price to enter in to the market usually 10%. It means a futures trader can make 10 times more profit than an outright trader who invests in full and buy the commodity.
Role of Futures Exchanges
Exchanges facilitate the auction between the buyer and the seller. Futures exchange is the centralized market place where the trading takes place. Contracts on Financial instruments were first introduced by Chicago Mercantile Exchange in the 1970s.It became huge success and it gave birth to new futures exchanges world over such as London International Financial Futures Exchange (1982) (now Euronext.liffe) Tokyo Commodity Exchange (TOCOM) Etc. There are more than 90such exchanges operates world over now.
Players in the Futures trading
Hedgers and speculators are the two most important players in the futures trading. A hedger is the producer of the commodity who participates in the futures trading to hedge him against the future fall in the price of the commodity. His primary aim is to insure himself against the loss he may make in the unfortunate event of fall in price.
A speculator is a person who enters the market to make some quick money. He buy and sells the contract almost immediately there by making some quick money. They include private investors and floor traders.
Summary
Futures is a great opportunity to make money. People see a great opportunity here when the stock markets are not doing well. There are many committed investors who would vouch for Futures trading quoting commodities are easier to forecast than that of stocks. We must also understand futures are extremely risky. You need the right kind of information and knowledge. There are various factors that dominate the movement of the price in these markets. Social, economical and political factors are few factors that dominate. A right advice is to follow the movements carefully and receive advice from trusted sources.
The series of articles on Futures trading will continue and we request you to sign the guest book with details of your opinion.
