futures

The Futures market has become quite popular over the last couple of decades & will remain one of the strongest trading strategies for some time to come. So what are futures & what do they mean to the average investor interested in stock trading? Many brokers around the world will trade futures contracts which is the process whereby the seller will provide a commodity on an agreed date in the future. Basically futures are financial derivatives which are also known as forward contracts.

A futures contract will usually be made for commodities like oats, sugar cane, natural gas, oil etc etc or many of the financial  indexes on the futures market.

Can the average investor trade in futures? Yes, anyone can trade futures but it can be a risky business. We’ve all seen over the last few years major institutions going belly up because of a rogue traders loosing huge amounts of money on future contracts sometimes even collapsing the financial institution they  were trading the contracts for.

A typical day trader will trade in futures so that he can make a profit in the difference between the buying price & the selling price but he will never own the actual commodity he is trading, always ensuring to get out before the contract expires, after all it wouldn’t be very practical to have a load of wheat dumped on to the front lawn every time you traded a futures contract.

You may be thinking that only day traders trade in future contracts but the fact is that futures are traded by long term traders also, they are also traded by non traders who will have a genuine interest in the commodity being sold like a like an airline CEO who will purchase fuel for the airline so that he’s guaranteed a set fuel price into the future.