Futures Trading
Unlike purchasing an options contract which gives the owner the right to purchase/sell an asset, futures are contracts that obligates the buyer/seller to purchase/sell an asset at a predetermined price and future date. Futures contracts help to facilitate the trading of commodities such as crude oil or natural gas, stock index futures such as the S&P 500, currencies such as the British pound, gold or silver futures, and even government debt securities such as U.S. Treasuries or bonds. However, most futures contracts do not actually involve the tangible delivery of the physical asset such as gold or wheat. Instead, a futures contract allows the investor to participate in the price movements of the market. Still, these contracts can have a substantial amount of risk attached to them. Because of their leveraged nature, while investors have the opportunity to make sizeable profits, they also run the risk of taking on a considerable loss.
What are hedgers and speculators?
There are two kinds of futures traders: hedgers and speculators. Hedgers participate in purchasing/selling of futures contracts in order to offset the costs or stabilize the revenues of their business operations. For example, if you plan to grow 100 bushels of wheat next year, you will most likely have two options. Either you could run the risk of selling it for whatever the market price is at the time of harvest or you could instead choose to sell a futures contracts that obligates you to sell the 100 bushels of wheat at an agreed upon price by the time of harvest. By agreeing upon a fixed price, you protect yourself from the chance that prices will fall between now and the time you harvest. However, likewise if prices skyrocket between now and the time you harvest, you could end up delivering your wheat for a price much lower than what the current market has priced.
Meanwhile, speculators typically look to futures contracts as a way to participate in the price movements of the market rather than desiring the delivery of a physical asset. These investors essentially place bets on the future prices of commodities. For example, if you believe that wheat prices are going to rise, you could make money from purchasing a futures contract and then quickly selling it once prices have risen. Speculators in the futures market to help with providing additional liquidity, although they are often blamed when there are large price swings that lead to rising and overblown input costs.
How Can I Invest In the Futures Market?
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Note: All investments involve potential risks, including loss of principal. Please consult with your professionals regarding your specific situation prior to making any investment decisions.
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