What is Futures Trading

The name says it all – Futures Trading is a punt on the future direction of value in various commodities. This is a little different to the usual stock market trading although plenty of speculators hope for a certain future value in their shares if they are to make any money. The trading is based around the concept of a Futures Contract.Do get confused about this kind of trading. With futures trading, you don't actually possess anything. The concept is that you guess what the future may hold for the prices of commodities that you will be trading. In plain language, you are speculating about what the prices of such goods will be in the future.

What is a Futures Contract?

It is a legally binding agreement, therefore contract, to buy or sell a commodity for a set price at a previously agreed time in the future.
If you buy a futures contract, you promise to pay the price of the asset at a stated time.

If you sell a futures contract, you are promising to transfer the asset to the buyer of the future at a agreed upon price at a stated time. Every futures contract has the following elements:

• A Buyer.
• A Seller.
• A fixed expiry date in the future.
• A price agreed upon, between the buyer and the seller, at the time of trade.

A Little History

The history of the Futures Contracts lies in the desire of producers of real goods to have some sort of guarantee for the price when they finally deliver the goods. So if you were a wheat farmer you would strike up an agreed price for your crop, maybe even before you have planted it, upon it's delivery next year. The contract buyer knows that he is going to get the wheat at that time at the agreed price and he removes the uncertainty from his supply chain.


Let's say you were a bread maker and you wanted a secure supply at a controlled price this type of contract would be very comforting. It could in fact give you a competitive edge against other bread makers if the price of grain increases by the time of the contracts maturity.

The futures contract that the farmer and baker agreed to would not merely be stored away. The contract may change hands as the seasons roll by. Depending on the situation the wheat farmer and his intended buyer may even trade these contracts to other third parties. There are occasions when the buyer of the futures contract may have a reason to change his position and not want to take the future delivery of the wheat. He would then search for some other buyer and offer the futures contract at a certain price. Sometimes the farmer would decide not to deliver on the wheat contract and would then pass on the promise to deliver to another capable farmer.

The transfer and trade of these contracts became known as futures trading.Soon people found that trading the contracts became a good way to make wealth. Within a short time there were people who began to buy and sell the futures contract without ever expecting to take the delivery of the commodity involved. All they wanted was to profit from the price changes. These people were called speculators. They try to profit by buying the futures contracts low and selling them high or selling them high and buying them back low. Today the concept of a Futures Contract extends to a broader range of commodities from gold to financials like bonds or currency.

So Where does it all happen?

The known cities where this kind of futures trading occurs includes the following.

1.New York Mercantile
2.Chicago Board of Trade
3.New York Cotton Exchange
4.Chicago Mercantile Exchange

Trading in the traditional or Standard Futures Contract requires a fair amount of capital and certain level of understanding of the particular commodity you might be following.

Today we have a new form of Futures Contract called the E-minis. These run off the S&P 500 and require considerably less capital and operate on a slight different mechanism. More on this later. As for the futures markets, here are some of the most popular that are being traded these days.

Futures Market Commodities

1. Financial Commodities This includes Currencies, Treasury bonds and Interest Rates, Individual Stocks and Stock Market Indexes

Currencies

Commonly know as the FOREX : foreign exchange. This involves the buying and selling whatever currency a trader wishes to gamble on.You would study the countries that are based on the given currency and make a decision about the direction of it's value. If you believe that you can profit from it's movement then you trade that currency. The well understood currencies that are being traded on include the British Pound, Japanese Yen and the US Dollar.

Interest Rate.

The centre of this variety of contract changes not only with interest rates but also with bonds and other kinds of financial exchanges.

2. Agriculture.Foods and Fibres, meats, wood.

A massive range of products included here from orange juice to lumber. If the farmer feels that the weather favours a good crop across the country this year he may lock in high price now from fear of prices falling from oversupply.A manufacturer of food products may do the same but in fear of a price rise if the crop is looking to be thin and therefore a price rise over the future months is likely.

3. Energy Futures.Crude oil, Gasoline, Natural gas, Heating oil, Electricity, Propane, Coal

As you can imagine the threat of global warming has made this area a very volatile market with a great deal interest in it's future. It is basically what makes the modern world function and is therefore a very strong trading area.

4. Metals.Copper, Gold, Silver, Platinum, Palladium, Aluminium.

With the huge expansion of the Chinese economy over the last few decades the demand for raw materials has sky rocketed. Metals are essential components to the construction of cities and China's massive plans for expansion have triggered mining booms in several countries. The subsequent down turn in demand over the last year has created a great interest in Gold and so we have seen huge trading in the metals futures.

Only the beginning..

This has been a brief introduction to the Futures Contract and we will continue our discussion in a future post.

 

Like all areas of trade I encourage you to seek good education before spending any money on this strategy for wealth creation.

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