Posted on 08 August 2011.
Many investors and traders shy away from buying and selling futures because they do not understand how the futures market works. While futures are more like options than stocks, due to the fact that like options futures also have an expiration date, trading futures is just as easy as buying and selling stocks. All one needs for buying and selling futures is a brokerage account that is capable of trading futures. Inputting and executing orders to buy and sell futures contracts is done in the same way as stocks, and can be done from any personal computer that has Internet access.
Futures are technically known as futures contracts. A futures contract is a contract to buy or sell a specific amount of the contract’s underlying instrument (which is a stock market index, commodity, or currency) at a specified price on a future date. A futures contract’s underlying instrument can include a wide variety of stock market indexes, commodities, or currencies, such as the Dow Jones Industrial Average, bushels of corn, ounces of gold, or the Euro, among many others. Futures contracts are bought and sold on futures exchanges that operate in similar fashion to stock market exchanges.
Unlike options, those buying and selling futures contracts that involve physical commodities are legally obligated to follow through with the contract requirements of a futures contract when the futures contract expires. This means that if you sell a futures contract for 100 bushels of corn, you need to be prepared to actually physically deliver 100 bushels of corn to the buyer of that futures contract. The root purpose of futures contracts is to facilitate the physical trade of commodities, so that those who grow and produce commodities can be assured that they can find buyers at a market driven price for their products. Futures contracts have been expanded into many non-commodity areas, such as stock market indexes. These types of futures contracts are settled financially.
Many traders and speculators use futures contracts to speculate on anticipated price moves in market indexes, commodities, and currencies. An investor would buy a futures contract to profit from an anticipated move higher in the price a market index, commodity, or currency. The higher the move above the target price (strike price) the futures contract makes before the expiration date, the higher the profit is for the buyer of the futures contract. Those who wish to profit from an anticipated move lower in the price a market index, commodity, or currency, can sell a futures contract short.
Traders and speculators in futures contracts relating to commodities do not typically hold their futures contracts until the futures contracts expire, so they are not obliged to physically deliver the commodity.
Those who wish to trade futures contracts are encouraged to learn as much as possible about buying and selling futures, which can be a very useful trading tool to take advantage of price moves in commodities and market indexes.
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