Future Trading

Details

Category: Trading Type

Future trading are an investment practice that often comes under fire by critics who allege that the speculative trading of future contracts causes price gouging and shortages and bubbles because it interferes with the normal cause and effect of supply and demand. While future trading can contribute to some of these negative impacts, it is doubtful that they are the sole cause of these circumstances. In fact, future trading can have some very positive contributions to the overall economy beyond the profit margins of speculative investors. When most people think of future trading, two things come to mind: extraordinary financial risk, and very rich people. Those two things often go hand in hand, but nowhere is that the case more so than in the world of future trading. Future is contracts for the delivery of specified amounts of a certain commodity, on a certain date in the future.

Future trading is unlike many other forms of investing, because one is not required to own or even buy the commodity. All that is necessary is to make a speculation on where the price of a particular commodity is going, and make a decision based on that. If an investor was speculating on crude oil, for instance, and he or she expected the price to go up in the future, that investor would buy crude oil future contracts. And if he or she expected that the price would be going down, the investor would sell crude oil future. The great majority of contracts exchanged in future trading are traded by speculators, who liquidate their position before the contract expires, taking either a profit or a loss from the transaction. In other words, the delivery of the commodity is not then the responsibility of the investor. The speculator involved in future trading does, however, play an important role in the economy. Most of all, they make it easier for those who actually need to deliver or take delivery of commodities, to plan for the future.

For example, a wheat farmer may want to guarantee the price he will get for the wheat he has growing but has not yet harvested. To secure his price, he can sell a future contract equal to the amount of wheat he expects to harvest. A manufacturer such as a bread company may buy the contract, also guaranteeing the price they will pay when the contract comes due. This avoids unpleasant surprises for both parties which would possibly occur if they had no other option than to buy and sell and the current market price when it came time for them to do business. Most likely the two parties won’t need to buy and sell at the same time, though, and this is where the role of the speculator is so important. Their involvement in future trading means there is always someone to buy the contracts being sold, or to sell the ones being purchased. Many of the commodities involved in future trading are agricultural, such as wheat, pork bellies, and orange juice concentrates. However, future contracts for many other “commodities” such as precious metals, currencies, and even interest rates, are also traded and exchanged.