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Futures Trading - 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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THERE IS ALWAYS RISK OF LOSS TRADING FUTURES. THEREFORE,
ONLY RISK CAPITAL YOU CAN AFFORD TO LOSE ON THESE TYPES
OF INVESTMENTS.
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