The futures market is an auction market where commodity contracts are bought and sold so that they can be delivered on a specific date. If you have seen footage on television of individuals in a trading pit on Wall Street using hand signals and yelling, this is the very exciting auction market that makes up the futures market.
The futures market gets especially busy when the outlook of the stock market looks uncertain. The volume increases and so does the amount of yelling and the number of hand signals becomes quite busy.
The futures contract is a derivative instrument. It is a contract where two parties reach an agreement that a set of financial instruments need to be transacted. This transaction is to occur on a specific date and will be delivered at a certain price.
These contracts are usually entered into to speculate and to hedge risk rather than deliver a physical good. So futures are used by speculators in addition to consumers and producers. Basically, the futures market is a large part of the stock market. It is very important as you can see from all of the yelling and hand signals that occur in the trading pit. The competition between buyers and sellers is quite intense and it is very exciting because price risk and futures margin are also managed and the market is a very liquid market. In addition to its liquidity, it is complex and it is risky. In other words, futures are not those who do not like risk. If you are someone who likes risk, then the futures market is going to be the right investment opportunity for you.
And if you want to invest in futures, then you may want to consult with a personal financial advisor because of the complexity involved in this market, as well as the fast pace that it entails.
Buyers and sellers from all over the world meet in the trading pit and enter into futures contracts. Bids and offers that are matched electronically tend to be the way to buy and sell, while there is also the "cry system" in which a lot of yelling takes place on the floor. The contract includes details such as when the future will be delivered and at what price it will be delivered.
There are different purposes behind futures. An example of how this works is this: A farmer wants to secure a selling price for next year's feed corn harvest, while another farmer may be working to secure a buying price for next year's wheat harvest as well as how much they can sell. So the wheat farmer may specify a certain amount of wheat to be delivered by a certain date at a certain price. By entering this contract, the wheat farmer is able to speculate on how much money will be made when it's time to sell after the harvest.
Everything from the quality to the quantity is specified in a futures contract. The specific price and the date of delivery are also determined and that is the price that is agreed upon.
As for the profit and loss, that depends solely on the daily movements of the market for each specific contract. This is calculated each day. On the day the commodity is to be delivered, one account is debited, while another is credited, thus the buyer spends while the seller gains.
The futures market may seem rather complicated, but the good news is that there is money to be made and your financial advisor can assist you with this. That way you can reap the benefits of the futures market.
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