A futures contract is a legally binding agreement between a buyer and a seller that calls for the seller to deliver to the buyer a specified quantity (and quality, for commodities) of a specific asset at a future date for a price agreed today.
To make money trading futures you need to be a buyer of the contract if you think the value of the commodity is going to go up, and a seller of the contract if you think it will go down. The settlement takes place at a future date but you always have to buy and sell at todays prices.
When a contract is either bought or sold you don't have to hold it until the settlement date. It is easier to either sell or buy it when there is a profit in the trade, at the current market price. There are a number of exchanges that regulate the buying and selling of futures contracts such as the CBOT (The Chicago Board Of Trade) and the LIFFE (The London International Futures And Options Exchange.
The futures market was originally started to help people like farmers and merchants manage the risk of their products against the potential supply and demand of the market. In farming for example when there is a bumper crop of say corn the price can fall dramatically and hurt the farmer, but if they have already sold a contract at a certain price they can still get a fair price for their products.
The use of futures in the farming industry has many benefits such as allowing the farmer to be able to plan ahead as he already knows what kind of profit he can expect from his crop of say coffee beans. The price may not be the best and the merchant may make a killing but the risk is reduced.
It makes sense for the farmer and the merchant to get together early in the season and agree the price to be paid for the produce at harvest time. This way the farmer can plan his expenses and the merchant can set his prices. In effect they are negotiating a type of futures contract, which provides them a way of eliminating the risk they face due to the uncertain future price of coffee beans.
The type of futures contract that you are trading is usually determined by the underlying asset, which could be either commodity based or financial based, such as stocks or bonds. This is a big change from the origins in the farming market.
There are a number of major Futures Exchanges, The Chicago Board of Trade (CBOT) was established in 1848 to allow farmers and merchants to negotiate future prices for their produce. The main task of the exchange was to standardize the quantity and quality of the produce that was traded. CBOT now offers futures contracts on many different underlying assets, including corn, oats, soybeans, wheat, silver and Treasury bonds.
The CME was started in 1919, it's main purpose was to enable a futures market in such items as pork bellies and live cattle. Today it also regulates the S&P500 stock index which is a very popular index for traders, including day traders.
Another large futures exchange is the London International Futures and Options Exchange (LIFFE) which started in 1982. It has grown very fast since then and financial products like the FTSE100, the GILT and Short Sterling trade on that exchange.
The EUREX is a 100% electronic exchange and started life in 1990. At the time many other exchanges were still using the open outcry system of trading in the pits.
Currencies are also traded as futures, the dollar, pund and Euro are very heavily traded.
Trading Futures online is now very popular amongst traders because of the good leverage and liquidity available, however unless you learn how to trade correctly you can lose a lot of money fast. On the other hand well trained futures traders can make consistent daily profits by following a disciplined and well throughout trading strategy.
Article Source: http://www.articlenorth.com
James J. Dehoiver is an experianced futures trader and will teach you how to day trading futures as well as some advanced futures options strategies, visit his website today.
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