Introduction to futures trading

INTRODUCTION TO FUTURES TRADING

Although commodity futures trading may seem to be difficult to perceive, it gets easier as soon as you learn its fundamentals.  The primary function of futures market is the increased liquidity as well as transfer of risk between traders having different time preferences and risks.  Consequently, trading of futures is a process of eliminating or decreasing risks, which often transpire during price fluctuations in the stock market.

Futures contracts are traded on an exchange in order to buy or sell a specific underlying instrument on a preset price at a specific future date.  These contracts are usually for the purpose of hedging or assumption.  Futures traders can be classified into two groups such as the hedgers and speculators.  Hedgers are mostly interested in the underlying instrument, seeking to hedge out or impede the risk of price changes.  On the other hand, speculators are mostly interested in generating profit through predicting the trends of the market and at the same time buying an instrument on paper in which they do not have practical usage.  Say, commodities can be bought at Tuesday’s price with the speculation of selling them on Friday at a higher price.

Consequently, hedging protects market prices fluctuations through allowing price change risks to be transferred to skilled risk takers.  Say, if a manufacturer protects itself from an increased price in raw materials, it needs to hedge in the futures market.  Thus, online futures trading are made more convenient and uncomplicated for traders since the prices are distributed in the Internet or through other practical sources such as telecommunications network.

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