Futures
Trading - Learn About Trading Commodity Futures with the
Help of this Basic Introduction
Futures trading involves the buying and selling of contracts on commodity
markets. The buyers and sellers speculate whether the price of a commodity is
going up or down in the future. Dozens of commodities, including grains,
livestock, precious metals, energy, foodstuffs, currency and interest rate
"commodity" futures are traded between
hundreds-of-thousands of investors every day. They are
all trying to make a profit by buying a commodity at a low price and selling
at a higher price. 97% of futures traders are speculators, but some are
hedgers: producers, pension companies or banks, etc. who are spreading the
risk of their investments by using futures. In fact, this is how futures
trading started...
Before futures trading, any producer of a commodity found himself at the mercy of a dealer when it came to
selling his product. The system needed to be legalized in order that a
specified amount and quality of product could be traded between producers and
dealers at a specified date. Contracts were drawn up between the two parties
specifying a certain amount and quality of a commodity that would be delivered
in a particular month.
Futures trading evolved as farmers and dealers
committed to buying and selling future exchanges of the commodity. The
farmer knew how much he would be paid in advance, and the dealer knew his
costs. Until twenty years ago, futures markets consisted of only a few farm
products, but now they have been joined by a huge number of tradable
‘commodities’.
Futures trading is mainly speculative 'paper' investing, i.e. it is rare for
the investors to actually hold the physical commodity, just a piece of paper
known as a futures contract. Like a contract, a futures investment has an expiration
date. You don't have to hold the contract until it expires. You can cancel it
anytime you like. In fact, many short-term traders only hold their contracts
for a few hours - or even minutes!
The expiration dates vary between commodities, and you have to choose which
contract fits your market objective.
Neither is their a limit on the number of contracts you can trade (within
reason - there must be enough buyers or sellers to trade with you.) Many
larger traders/investment companies/banks, etc. may trade thousands of futures
contracts at a time.
All futures contracts are standardized in that they all hold a specified
amount and quality of a commodity.
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