Futures Trading

Futures trading involves a contract between two parties to buy or sell a specific quantity of an underlying asset at a certain price at a certain date in the future. Agricultural commodities trading has been practiced for more than 100 years in the United States. 

In recent times, Future trading has been extended to many more items including financial instruments, crude oil, natural gas, dairy products, electricity, weather derivatives, and sea food. 

Options on futures give the right, but not the obligation to buy or sell a specified quantity of a security at a set price, on or before a certain date. 

A lot of the trading in futures and options markets is conducted by hedgers who are trading commodities that they use. They take up positions to reduce the chances of losses if there is any adverse change in prices. Speculators who hope to profit from changes in the prices of commodities also trade futures and options. 

Usually, futures prices tend to change more quickly that stock and real estate prices. Due to this a futures trader who is able to predict trends with greater accuracy, can make a lot of money quickly. The reverse is also true and if a trader gets it wrong, he/she can lose a great deal of money very quickly. 

Futures are highly leveraged investments, and this can increase the scope for profits as well as losses. Futures traders usually have to deposit only 10 to 15 percent of the value of the underlying contract. The future trade involves very low commissions as compared to other investments.

Trading futures is normally conducted on a futures exchange, by members of the exchange, according to established procedures. The futures exchange specifies certain standard clauses that are included in contracts to ensure liquidity. 

The highly standardized contract usually mentions the price, quantity, and a standardized date of delivery, which is known as the expiration date. Most futures contracts are offset before maturity by an opposite transaction for an equal value. 

The seller can choose to make delivery of the goods against outstanding futures contracts. In practice, physical delivery of the items being traded very rarely takes place. In most cases, the futures contracts are settled before the due date or are closed by paying the difference amount due. 

Futures trades help in the process of price discovery, because many different types of investors are involved in it. Futures prices may be based on current cash prices, general economic factors, and expectations about future prices. 

Trading futures can be a complex and risky business, and it is not suitable for everyone. Take time to learn about how to trade futures and think about how much money you can really afford to put at risk. It is best to talk to an independent financial advisor, and to be clear about your goals before you step into the futures trade.