The Futures Market
The futures markets are mysterious to many people. Typically you see images of men wearing coloured jackets and making strange hand signals and throwing pieces of paper down. You hear about contracts such as “pork bellies”. This article is about the futures markets, and outlines the trading opportunities available and how you can trade the range of commodities available.
The futures markets don’t just offer agricultural commodities, they offer a range of different standardised futures contracts. Standardisation is the key – a futures contract is specifically defined in terms of what the contract is for, and when it is due.
Unlike with forex, futures trading occurs through particular markets, such as the Chicago Board of Trade. These markets define their own contracts.
Generally futures contracts can be traded into the future, and come due every 3 months. For example, you may wish to buy one September 2009 gold contract. This will represent a certain quantity and quality of gold. At the end of the contract, depending on the contract, you can take delivery of the physical commodity but in most cases, the trader settles in cash.
The futures markets allow you to go both long (buy contracts) and go short (sell contracts). You can short sell, which means to sell something you haven’t yet bought. Generally you can buy and sell at any time the markets are open. Market liquidity is the greatest for the nearest contract month, and liquidity varies by market. If you trade an obscure market and select a settlement date into the future, it may be difficult to buy or sell the contract.
Here are some of the types of contracts available on the futures markets:
- Financials – stock indices, interest rates, bonds
- Precious metals – gold, silver, platinum, palladium
- Base metals – copper, zinc, lead
- Energy – gasoline, crude oil, gas, electricity
- Softs – cocoa, coffee, sugar
- Grains – wheat, corn, soybeans
- Agricultural products – beef, wool, cotton, lumber
So there are a wide range of contracts that you can select. The heaviest trading is generally in stock indices.
Traders like futures markets because of this range, and the leverage and that you can go “long” or “short”. Generally you only need to put down a few percent of the value of the contract. This multiplies the power of your money, resulting in significant gains or losses. This leverage can speed your way to riches or the poorhouse. If you lose, you get a margin call and immediately need to put more cash into your account.
A lot of futures trading now occurs through online brokers. When choosing a broker, make sure that the broker is registered with the appropriate statutory body, such as the NFA.
Futures trading is like any other trading. Once you develop the basic skills, you can trade almost any market.
Tags: futures market, Futures Trading