Futures Markets

Futures Markets Introduction

Futures markets contain three main underlying instruments including currencies, stock indexes and commodities. There are also some individual stock futures that you will learn about during your trading education however these are not as popular as the three main instruments. This market has several advantages over other markets including the fact that there is a good range of price movement and liquidity, some markets are available for day trading 24 hours per day and there is a wide variety of underlying instruments.

The majority of the futures markets participants who practice futures trading are institutional or commercial users of the commodities that they trade. Most of these users are referred to as “hedgers” and their goal is to increase the value of their assets and limit any loss in value. Hedgers use the commodity markets to take a position that will reduce the risk of financial loss in their assets due to a change in price. The other market participants are known as “speculators” and their goal is to profit from the changes in the prices of future or options contracts. Many market participants practice their futures trading online.

When learning how to invest, you will learn that futures contracts are agreements to buy or sell a specific quantity of a commodity at a specific price during a particular time period in the futures markets. Most of these contracts are liquidated before the delivery date and some contracts require cash settlement in lieu of delivery. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract.

Day traders will trade futures contracts to make a profit on the difference between the buying price and the selling price, and they never own the actual commodity. They must ensure that they do not have any open positions when trading online and when the futures contracts are set to expire. Both the buyer and the seller are obligated to fulfill the futures contract requirements at the end of the contract term when trading in the futures markets. Again, day traders, trading online, never see these contracts through to the end anyway, so they are less concerned with the obligations.