Futures & Commodity Trading – Things to Know

Futures trading simply mean the trading of contracts. The future contracts enable the holder to buy the underlying product at a certain time at a predetermined price. Thus the holder can earn the product regardless of the market price at that time. The price of the underlying product is usually is or around the market price at the time of the contract creation. As stocks are traded in stock markets, futures contracts are traded in centralized futures trading markets like S&P, CME, NYMEX, CBOT and Globex.

The buying and selling of futures contracts are termed as going ‘long’ and ‘short’ respectively. There are mainly two types of futures trading contracts available as financial or money futures and commodity futures. Financial futures are futures trading contracts which require a cash settlement at the end of the contract. That is the underlying product is a money-based one like bonds, treasury notes, mutual funds, etc. Commodity futures are futures trading contracts which require a physical delivery of product at the end of the contract. That is the underlying product is a true product with mass. Commodity futures include contracts for energy commodities, metals & minerals, agricultural commodities etc.

The futures traders can be grouped in to two broad categories as Hedgers and Speculators. Hedgers are futures traders who buy futures contracts for the sole purpose of owning the underlying commodity/money. They do so for achieving protection against price changes. Speculators are futures traders who buy and sell these contracts for earning profit. They do so against changes in market price of these contracts not the underlying commodities. Speculators include arbitrages, position traders, day traders and swing traders.

One another group to be remembered are the futures trading brokers or Futures Commission Merchants (FCMs). They are the middlemen between the futures trading markets and public traders. They collect margin sums from traders and deposit in futures market to make the traders qualified to trade on those markets. They are responsible for providing and managing futures trading accounts. They also provide the trading systems to find and trade contracts. In return, they charge a fee, which mainly depends on the type of trading account, trading frequency and trading volume of the traders. The futures brokers may be either full service brokers or discount futures brokers.

Although futures and commodity trading involves a serious risk of loss, futures trading holds many advantages over other types of trades. They include noted liquidity, simplicity in trades, price stability of products, comparative market stability, low commission charges, easy in going short and long, availability of different contract sizes (mini futures, standard futures & large futures), ability to trade from home, a variety of underlying products, and above all the easy to own underlying product.

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