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What are futures and why should you be interested!
If you have read any financial news lately, you may have heard about futures and the futures market, but what are those futures?
Futures refers to future contracts, which are traded on the futures markets. Futures refers to futures contracts, which can be one of two different types, one which covers the physical delivery for a specific commodity and one which covers a cash settlement. The futures contract should specify the month that the settlement or delivery will take place. Even with contracts that call for the physical delivery of the commodity it is rare for the actual physical delivery to take place. Instead, traders in the futures market normally buy and sell futures contracts before the delivery date arrives. Selling a futures contract that was purchased previously means that the futures position is liquidated, and buying a futures contract that was previously sold will offset the trade. With futures contracts, a loss or gain is simply the difference in price between what the contract was bought for and the price the contract was sold for.
In the futures market, there are three types of participants, hedgers, speculators, and floor traders. A hedger is a firm or individual who makes purchases and sales of futures contracts simply to set a price level that is known, so that weeks or months later the hedger can buy or sell it in the cash market, like the bond market or grain elevator. A hedger tries to protect against any risks for a price change that is unfavorable in the time period in between. A hedger will give up the chance to see benefits from price changes that are favorable in exchange for protection from price changes that are unfavorable.
Speculators are another type of participant in the futures market. A speculator can be an individual or a firm, and these participants attempt to profit from any expected decreases and increases in prices for futures. A speculator may go long or short, depending on their belief concerning the trade and futures prices. A speculator who thinks that futures prices will go up will buy, and take the position called going long. If a speculator believes that futures prices will drop will go short, which means selling the futures contracts with the plan to buy them again when the price falls.
The third type of participant is a floor trader, and these participants are on the trading floor buying and selling futures for their own accounts. Floor traders allow the market more liquidity, and floor traders may take a trade if there are no other traders who will right then. Many times floor traders may only hold onto a trade for seconds, and may only make a fraction of a cent on each unit traded.
Basically futures are contracts for future commodities, and these contracts are bought, sold, and traded with the hopes of making a profit on the increase or decrease of future prices. Futures contracts can contain almost any commodity, from specific grain such as rice or wheat, to other foods like orange juice, all the way to precious metals and others. Futures trading means that participants can make a profit from prices declining just as well as they can from prices increasing. Trading in futures can be just as risky as trading in stocks and bonds, and there is a potential for loss in the futures market as well as the other markets. Futures trading should be approached with just as much caution as trading on any other market would be, and because of this traders should never use money that they can not afford to lose if they are wrong and make bad trades.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.