Many investors are taking part in futures trading, particularly future contracts. This type of dealing has become widely used due to more liquidity on the market. Oftentimes, the actual delivery of the commodities is rarely taken at the conclusion of the contract period. This will be a brief article which we hope to describe a little more about this type of investing and trading.
Future contracts are not cash commodities; they have a restricted life span. In simple terms this means that as a buyer, you agree to pay a set price on a set date for the underlying commodity. Gains and losses are based upon the actual price and the fixed price agreed on. The futures trader will put a small fraction of the underlying contract, usually from 10-15% margin. This does not represent a down payment; it acts as a performance bond.
This type of trading is frequently more tumultuous compared to the stock market. Future contracts could gain at one time than go downward the next, basically set by variables that are very complicated, thus which makes it very volatile.
There are typically two main groups which will take part in the futures trading sector. One called the speculator and the other being the hedgers. The spectators are ones whom will take the absolute position, basically either long or short on the market. They are by most part called "independent floor traders" or "locals". The locals typically are known to trade for brokerages or personal clients. They often times may also trade spreads. The hedgers are generally consumers or companies whom deal with the trading of cash commodities. Hedgers also use the futures to try to avoid undesirable price movements.
Futures contracts follow rigorous standards. The contract should state which currency, the actual interest rate, the delivery month, the amount of the actual underlying assets as well as units. It should also state the settlement type as in physical or cash and also the last date of trading.
In closing, it is a fact that future contracts are on the most part created solely for the purpose of speculation and/or hedging. This particular market is very actively traded that allows for a multitude of price fluctuations and ranges. Some futures permit trading twenty-four hours a day, and the market also has an excellent liquidity and volume. Every contract area has its own specifications and details and in general commissions tend to be low for future contracts.