Futures trading is another investment option available for people who may wish to invest their money. It usually involves trading in commodities that have a delivery date on a particular time in the future. There are certain advantages and disadvantages associated with futures trading. It is important that the new investor know how this type of trading works before even trying to risk a certain amount of capital.
Future trading involves trading futures contracts. A future contract is a deal between a producer and a customer on a future delivery of a certain quantity of things at a certain price. The futures contract developed when farmers of grains commenced setting up agreements with interested customers for future crops.
A farmer may offer in the market about 8000 bushels of wheat that may be delivered on a certain month of next year. There would be interested purchasers who may wish to maintain their wheat supply for next year and would wish to buy such futures contracts to be sure. On a deal on the price for the future produce, the farmer and the purchaser have gone into making a futures contract.
The futures contract is well suited for both the farmer and the buyer. The farmer would know I advance just how much he would be paid for the harvest next year while the buyer would know the costs of future supply of wheat now. What the farmer and the buyer will do is make a written contract that would sometimes involve a certain amount of cash as a guarantee of the contract.
The futures contract the 2 parties agreed to wouldn’t just be stored in someplace safe. The contract may even change hands in the course of time before the date of delivery. Dependent on the circumstances, farmers and purchasers may even trade these contracts to other interested parties. There are times the customer of the futures contract can have a change of mind and wouldn’t need to take the future delivery of the produce. He would then find some other purchaser who would be interested and offer the futures contract at a certain cost. There also are times the farmer would decide to not deliver on the stated contract and would then pass on the duty to supply to another interested farmer. The transfer and trade of these contracts came to be known as commodities trading.
Many people have discovered that trading the contracts became a good way to make money. Soon, there were people who began to buy and sell the futures contract without intending to take the delivery for themselves. All they wanted was to profit from the price changes that the futures contracts go through. These people are called speculators who try to profit by buying the futures contracts low and selling them high.
This is how futures trading usually happen in the market. By knowing and understanding how it operates, people may then decide if such a market truly presents a good opportunity for investment. Futures trading has its own strengths and weaknesses. It is up to the savvy investor and trader to make the best use out of them in order to earn profits.
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