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Buying a Futures Contract: A Win-Win Situation

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Buying a futures contract is a great way to make money on the commodities market. Futures can be tricky business if you do not know what you are doing, however, and it is important that you understand the process before you make your purchase. The basic concept behind futures is relatively simple. When an investor buys a futures agreement, they agree to buy a certain amount of a product at a set price on a certain date. The price is set based on the predicted price of the product on the set date. The price can be based on a number of factors such as presumed demand and predicted growing or manufacturing conditions. The investor can make money on the transaction in two different ways. First, they receive a premium for the risk they are taking. Second, if the product is more successful than predicted, the investor can still buy it for the lower, set price and then sell it for the higher, market price.

  Why Everyone Benefits from a Futures Contract

In spite of the fact that the investor appears to gain the most from a futures contract, futures are also loved by sellers and product manufacturers. When a company sells futures, it is solidifying the future price of its products. While the futures price may turn out to be lower than expected, it could also turn out to be higher than expected. Many companies are more than willing to risk losing a bit of money on their futures sales in exchange for the guarantee that they will sell a set amount of stock at that set price, regardless of the market price. While it is possible for an investor to lose money, should the predicted price be drastically higher than the market price, they can still benefit from the premium paid to cover their risk. When you buy a futures contract, everyone wins.

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