Futures Fundamentals

Futures Fundamentals
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Table of Contents
1) Futures Fundamentals: Introduction
2) Futures Fundamentals: A Brief History
3) Futures Fundamentals: How The Market Works
4) Futures Fundamentals: The Players
5) Futures Fundamentals: Characteristics
6) Futures Fundamentals: Strategies
7) Futures Fundamentals: How To Trade
8) Futures Fundamentals: Conclusion

Introduction

What we know as the futures market of today came from some humble
beginnings. Trading in futures originated in Japan during the 18th century and
was primarily used for the trading of rice and silk. It wasn't until the 1850s that the
U.S. started using futures markets to buy and sell commodities such as cotton,
corn and wheat.

A futures contract is a type of derivative instrument, or financial contract, in which
two parties agree to transact a set of financial instruments or physical
commodities for future delivery at a particular price. If you buy a futures contract,
you are basically agreeing to buy something that a seller has not yet produced
for a set price. But participating in the futures market does not necessarily mean
that you will be responsible for receiving or delivering large inventories of
physical commodities - remember, buyers and sellers in the futures market
primarily enter into futures contracts to hedge risk or speculate rather than
to exchange physical goods (which is the primary activity of the cash/spot
market). That is why futures are used as financial instruments by not only
producers and consumers but also speculators.

The consensus in the investment world is that the futures market is a major

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financial hub, providing an outlet for intense competition among buyers and
sellers and, more importantly, providing a center to manage price risks. The
futures market is extremely liquid, risky and complex by nature, but it can be
understood if we break down how it functions.

While futures are not for the risk-averse, they are useful for a wide range of
people. In this tutorial, you'll learn how the futures market works, who uses
futures and which strategies will make you a successful trader on the futures
market.

A Brief History

Before the North American futures market originated some 150 years ago,
farmers would grow their crops and then bring them to market in the hope of
selling their inventory. But without any indication of demand, supply often
exceeded what was needed and unpurchased crops were left to rot in the
streets! Conversely, when a given commodity - wheat, for instance - was out of
season, the goods made from it became very expensive because the crop was
no longer available.

In the mid-19th century, central grain markets were established and a central
marketplace was created for farmers to bring their commodities and sell them
either for immediate delivery (spot trading) or for forward delivery. The latter
contracts - forward contracts - were the forerunners to today's futures contracts.
In fact, this concept saved many a farmer the loss of crops and profits and
helped stabilize supply and prices in the off-season.

Today's futures market is a global marketplace for not only agricultural goods, but
also for currencies and financial instruments such as Treasury bonds
and securities (securities futures). It's a diverse meeting place of farmers,
exporters, importers, manufacturers and speculators. Thanks to modern
technology, commodities prices are seen throughout the world, so a Kansas
farmer can match a bid from a buyer in Europe.

How the Market Works

The futures market is a centralized marketplace for buyers and sellers from
around the world who meet and enter into futures contracts. Pricing can be
based on an open cry system, or bids and offers can be matched electronically.
The futures contract will state the price that will be paid and the date of delivery.
But don't worry, as we mentioned earlier, almost all futures contracts end without
the actual physical delivery of the commodity.

This tutorial can be found at: http://www.investopedia.com/university/futures/
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What Exactly Is a Futures Contract?
Let's say, for example, that you decide to subscribe to cable TV. As the buyer,
you enter into an agreement with the cable company to receive a specific number
of cable channels at a certain price every month for the next year. This contract
made with the cable company is similar to a futures contract, in that you have
agreed to receive a product at a future date, with the price and terms for delivery
already set. You have secured your price for now and the next year - even if the
price of cable rises during that time. By entering into this agreement with the
cable company, you have reduced your risk of higher prices.

That's how the futures market works. Except instead of a cable TV provider, a
producer of wheat may be trying to secure a selling price for next season's crop,
while a bread maker may be trying to secure a buying price to determine how
much bread can be made and at what profit. So the farmer and the bread maker
may enter into a futures contract requiring the delivery of 5,000 bushels of grain
to the buyer in June at a price of $4 per bushel. By entering into this futures
contract, the farmer and the bread maker secure a price that both parties believe
will be a fair price in June. It is this contract - and not the grain per se - that can
then be bought and sold in the futures market.

So, a futures contract is an agreement between two parties: a short position - the
party who agrees to deliver a commodity - and a long position - the party who
agrees to receive a commodity. In the above scenario, the farmer would be the
holder of the short position (agreeing to sell) while the bread maker would be the
holder of the long (agreeing to buy). We will talk more about the outlooks of the
long and short positions in the section on strategies, but for now it's important to
know that every contract involves both positions.

In every futures contract, everything is specified: the quantity and quality of the
commodity, the specific price per unit, and the date and method of delivery. The
“price” of a futures contract is represented by the agreed-upon price of the
underlying commodity or financial instrument that will be delivered in the future.
For example, in the above scenario, the price of the contract is 5,000 bushels of
grain at a price of $4 per bushel.

Profit And Loss - Cash Settlement
The profits and losses of a futures contract depend on the daily movements of
the market for that contract and are calculated on a daily basis. For example, say
the futures contracts for wheat increases to $5 per bushel the day after the above
farmer and bread maker enter into their futures contract of $4 per bushel. The
farmer, as the holder of the short position, has lost $1 per bushel because the
selling price just increased from the future price at which he is obliged to sell his
wheat. The bread maker, as the long position, has profited by $1 per bushel
because the price he is obliged to pay is less than what the rest of the market is

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obliged to pay in the future for wheat.

On the day the change occurs, the farmer's account is debited $5,000 ($1 per
bushel X 5,000 bushels) and the bread maker's account is credited by $5,000 ($1
per bushel X 5,000 bushels). As the market moves every day, these kinds of
adjustments are made accordingly. Unlike the stock market, futures positions are
settled on a daily basis, which means that gains and losses from a day's trading
are deducted or credited to a person's account each day. In the stock market, the
capital gains or losses from movements in price aren't realized until the investor
decides to sell the stock or cover his or her short position.

As the accounts of the parties in futures contracts are adjusted every day, most
transactions in the futures market are settled in cash, and the actual physical
commodity is bought or sold in the cash market. Prices in the cash and futures
market tend to move parallel to one another, and when a futures contract
expires, the prices merge into one price. So on the date either party decides to
close out their futures position, the contract will be settled. If the contract was
settled at $5 per bushel, the farmer would lose $5,000 on the futures contract
and the bread maker would have made $5,000 on the contract.

But after the settlement of the futures contract, the bread maker still needs wheat
to make bread, so he will in actuality buy his wheat in the cash market (or from a
wheat pool) for $5 per bushel (a total of $25,000) because that's the price of
wheat in the cash market when he closes out his contract. However, technically,
the bread maker's futures profits of $5,000 go towards his purchase, which
means he still pays his locked-in price of $4 per bushel ($25,000 - $5,000 =
$20,000). The farmer, after also closing out the contract, can sell his wheat on
the cash market at $5 per bushel but because of his losses from the futures
contract with the bread maker, the farmer still actually receives only $4 per
bushel. In other words, the farmer's loss in the futures contract is offset by the
higher selling price in the cash market - this is referred to as hedging.

Now that you see that a futures contract is really more like a financial position,
you can also see that the two parties in the wheat futures contract discussed
above could be two speculators rather than a farmer and a bread maker. In such
a case, the short speculator would simply have lost $5,000 while the long
speculator would have gained that amount. In other words, neither would have to
go to the cash market to buy or sell the commodity after the contract expires.)

Economic Importance of the Futures Market
Because the futures market is both highly active and central to the global
marketplace, it's a good source for vital market information and sentiment
indicators.

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Price Discovery - Due to its highly competitive nature, the futures market has
become an important economic tool to determine prices based on today's and
tomorrow's estimated amount of supply and demand. Futures market prices
depend on a continuous flow of information from around the world and thus
require a high amount of transparency. Factors such as weather, war, debt
default, refugee displacement, land reclamation and deforestation can all have a
major effect on supply and demand and, as a result, the present and future price
of a commodity. This kind of information and the way people absorb it constantly
changes the price of a commodity. This process is known as price discovery.

Risk Reduction - Futures markets are also a place for people to reduce risk
when making purchases. Risks are reduced because the price is pre-set,
therefore letting participants know how much they will need to buy or sell. This
helps reduce the ultimate cost to the retail buyer because with less risk there is
less of a chance that manufacturers will jack up prices to make up for profit
losses in the cash market.

The Players
The players in the futures market fall into two categories: hedgers and
speculators.

Hedgers
Farmers, manufacturers, importers and exporters can all be hedgers. A hedger
buys or sells in the futures market to secure the future price of a commodity
intended to be sold at a later date in the cash market. This helps protect against
price risks.

The holders of the long position in futures contracts (the buyers of the
commodity), are trying to secure as low a price as possible. The short holders of
the contract (the sellers of the commodity) will want to secure as high a price as
possible. The futures contract, however, provides a definite price certainty for
both parties, which reduces the risks associated with price volatility. Hedging by
means of futures contracts can also be used as a means to lock in an acceptable
price margin between the cost of the raw material and the retail cost of the final
product sold.

Example:
A silversmith must secure a certain amount of silver in six
months time for earrings and bracelets that have already

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been advertised in an upcoming catalog with specific prices.
But what if the price of silver goes up over the next six
months? Because the prices of the earrings and bracelets
are already set, the extra cost of the silver can't be passed
on to the retail buyer, meaning it would be passed on to the
silversmith. The silversmith needs to hedge, or minimize her
risk against a possible price increase in silver. How?

The silversmith would enter the futures market and
purchase a silver contract for settlement in six months time
(let's say June) at a price of $5 per ounce. At the end of the
six months, the price of silver in the cash market is actually
$6 per ounce, so the silversmith benefits from the futures
contract and escapes the higher price. Had the price of
silver declined in the cash market, the silversmith would, in
the end, have been better off without the futures contract. At
the same time, however, because the silver market is very
volatile, the silver maker was still sheltering himself from risk
by entering into the futures contract.

So that's basically what hedging is: the attempt to minimize
risk as much as possible by locking in prices for future
purchases and sales. Someone going long in a securities
future contract now can hedge against rising equity prices in
three months. If at the time of the contract's expiration the
equity price has risen, the investor's contract can be closed
out at the higher price. The opposite could happen as well:
a hedger could go short in a contract today to hedge against
declining stock prices in the future.

A potato farmer would hedge against lower French fry
prices, while a fast food chain would hedge against higher
potato prices. A company in need of a loan in six months
could hedge against rising interest rates in the future, while
a coffee beanery could hedge against rising coffee bean
prices next year.

Speculators
Other market participants, however, do not aim to minimize risk but rather to
benefit from the inherently risky nature of the futures market. These are the
speculators, and they aim to profit from the very price change that hedgers are
protecting themselves against. Hedgers want to minimize their risk no matter
what they're investing in, while speculators want to increase their risk and

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therefore maximize their profits.

In the futures market, a speculator buying a contract low in order to sell high in
the future would most likely be buying that contract from a hedger selling a
contract low in anticipation of declining prices in the future.

Unlike the hedger, the speculator does not actually seek to own the commodity in
question. Rather, he or she will enter the market seeking profits by offsetting
rising and declining prices through the buying and selling of contracts.

Short Long
Secure a price Secure a price
The now to protect now to protect
Hedger against future against future
declining prices rising prices
Secure a price Secure a price
The now in now in
Speculator anticipation of anticipation of
declining prices rising prices

In a fast-paced market into which information is continuously being fed,
speculators and hedgers bounce off of - and benefit from - each other. The closer
it gets to the time of the contract's expiration, the more solid the information
entering the market will be regarding the commodity in question. Thus, all can
expect a more accurate reflection of supply and demand and the corresponding
price.

Regulatory Bodies
The U.S. futures market is regulated by the Commodity Futures Trading
Commission (CFTC) an independent agency of the U.S. government. The market
is also subject to regulation by the National Futures Association (NFA), a self-
regulatory body authorized by the U.S. Congress and subject to CFTC
supervision.

A broker and/or firm must be registered with the CFTC in order to issue or buy or
sell futures contracts. Futures brokers must also be registered with the NFA and
the CFTC in order to conduct business. The CFTC has the power to seek
criminal prosecution through the Department of Justice in cases of illegal activity,
while violations against the NFA's business ethics and code of conduct can
permanently bar a company or a person from dealing on the futures exchange. It
is imperative for investors wanting to enter the futures market to understand
these regulations and make sure that the brokers, traders or companies acting
on their behalf are licensed by the CFTC.

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In the unfortunate event of conflict or illegal loss, you can look to the NFA for
arbitration and appeal to the CFTC for reparations. Know your rights as an
investor!

Characteristics

Given the nature of the futures market, the calculation of profit and loss will be
slightly different than on a normal stock exchange. Let's take a look at the main
concepts:

Margins
In the futures market, margin has a definition distinct from its definition in the
stock market, where margin is the use of borrowed money to purchase securities.
In the futures market, margin refers to the initial deposit of "good faith" made into
an account in order to enter into a futures contract. This margin is referred to as
good faith because it is this money that is used to debit any day-to-day losses.

When you open a futures contract, the futures exchange will state a minimum
amount of money that you must deposit into your account. This original deposit of
money is called the initial margin. When your contract is liquidated, you will be
refunded the initial margin plus or minus any gains or losses that occur over the
span of the futures contract. In other words, the amount in your margin account
changes daily as the market fluctuates in relation to your futures contract. The
minimum-level margin is determined by the futures exchange and is usually 5%
to 10% of the futures contract. These predetermined initial margin amounts are
continuously under review: at times of high market volatility, initial margin
requirements can be raised.

The initial margin is the minimum amount required to enter into a new futures
contract, but the maintenance margin is the lowest amount an account can reach
before needing to be replenished. For example, if your margin account drops to a
certain level because of a series of daily losses, brokers are required to make a
margin call and request that you make an additional deposit into your account to
bring the margin back up to the initial amount.

Let's say that you had to deposit an initial margin of $1,000 on a contract and the
maintenance margin level is $500. A series of losses dropped the value of your
account to $400. This would then prompt the broker to make a margin call to you,
requesting a deposit of at least an additional $600 to bring the account back up
to the initial margin level of $1,000.

Word to the wise: when a margin call is made, the funds usually have to be
delivered immediately. If they are not, the brokerage can have the right to
liquidate your position completely in order to make up for any losses it may have

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incurred on your behalf.

Leverage: The Double-Edged Sword
In the futures market, leverage refers to having control over large cash amounts
of commodities with comparatively small levels of capital. In other words, with a
relatively small amount of cash, you can enter into a futures contract that is worth
much more than you initially have to pay (deposit into your margin account). It is
said that in the futures market, more than any other form of investment, price
changes are highly leveraged, meaning a small change in a futures price can
translate into a huge gain or loss.

Futures positions are highly leveraged because the initial margins that are set by
the exchanges are relatively small compared to the cash value of the contracts in
question (which is part of the reason why the futures market is useful but also
very risky). The smaller the margin in relation to the cash value of the futures
contract, the higher the leverage. So for an initial margin of $5,000, you may be
able to enter into a long position in a futures contract for 30,000 pounds of coffee
valued at $50,000, which would be considered highly leveraged investments.

You already know that the futures market can be extremely risky and,therefore,
not for the faint of heart. This should become more obvious once you understand
the arithmetic of leverage. Highly leveraged investments can produce two results:
great profits or greater losses.

As a result of leverage, if the price of the futures contract moves up even slightly,
the profit gain will be large in comparison to the initial margin. However, if the
price just inches downwards, that same high leverage will yield huge losses in
comparison to the initial margin deposit. For example, say that in anticipation of a
rise in stock prices across the board, you buy a futures contract with a margin
deposit of $10,000, for an index currently standing at 1300. The value of the
contract is worth $250 times the index (e.g. $250 x 1300 = $325,000), meaning
that for every point gain or loss, $250 will be gained or lost.

If after a couple of months, the index realized a gain of 5%, this would mean the
index gained 65 points to stand at 1365. In terms of money, this would mean that
you as an investor earned a profit of $16,250 (65 points x $250); a profit of 162%!

On the other hand, if the index declined 5%, it would result in a monetary loss of
$16,250 - a huge amount compared to the initial margin deposit made to obtain
the contract. This means you still have to pay $6,250 out of your pocket to cover
your losses. The fact that a small change of 5% to the index could result in such
a large profit or loss to the investor (sometimes even more than the initial
investment made) is the risky arithmetic of leverage. Consequently, while the
value of a commodity or a financial instrument may not exhibit very much price
volatility, the same percentage gains and losses are much more dramatic in

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futures contracts due to low margins and high leverage.

Pricing and Limits
As we mentioned before, contracts in the futures market are a result of
competitive price discovery. Prices are quoted as they would be in the cash
market: in dollars and cents or per unit (gold ounces, bushels, barrels, index
points, percentages and so on).

Prices on futures contracts, however, have a minimum amount that they can
move. These minimums are established by the futures exchanges and are known
as “ticks.” For example, the minimum sum that a bushel of grain can move
upwards or downwards in a day is a quarter of one U.S. cent. For futures
investors, it's important to understand how the minimum price movement for each
commodity will affect the size of the contract in question. If you had a grain
contract for 3,000 bushels, a minimum of $750 (0.25 cents x 3,000) could be
gained or lost on that particular contract in one day.

Futures prices also have a price change limit that determines the prices between
which the contracts can trade on a daily basis. The price change limit is added to
and subtracted from the previous day's close and the results remain the upper
and lower price boundary for the day.

Say that the price change limit on silver per ounce is $0.25. Yesterday, the price
per ounce closed at $5. Today's upper price boundary for silver would be $5.25
and the lower boundary would be $4.75. If at any moment during the day the
price of futures contracts for silver reaches either boundary, the exchange shuts
down all trading of silver futures for the day. The next day, the new boundaries
are again calculated by adding and subtracting $0.25 to the previous day's close.
Each day the silver ounce could increase or decrease by $0.25 until an
equilibrium price is found. Because trading shuts down if prices reach their daily
limits, there may be occasions when it is NOT possible to liquidate an existing
futures position at will.

The exchange can revise this price limit if it feels it's necessary. It's not
uncommon for the exchange to abolish daily price limits in the month that the
contract expires (delivery or “spot” month). This is because trading is often
volatile during this month, as sellers and buyers try to obtain the best price
possible before the expiration of the contract.

In order to avoid any unfair advantages, the CTFC and the futures exchanges
impose limits on the total amount of contracts or units of a commodity in which
any single person can invest. These are known as position limits and they ensure
that no one person can control the market price for a particular commodity.

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Strategies

Essentially, futures contracts try to predict what the value of an index or
commodity will be at some date in the future. Speculators in the futures market
can use different strategies to take advantage of rising and declining prices. The
most common are known as going long, going short and spreads.

Going Long
When an investor goes long - that is, enters a contract by agreeing to buy and
receive delivery of the underlying at a set price - it means that he or she is trying
to profit from an anticipated future price increase.

For example, let's say that, with an initial margin of $2,000 in June, Joe the
speculator buys one September contract of gold at $350 per ounce, for a total of
1,000 ounces or $350,000. By buying in June, Joe is going long, with the
expectation that the price of gold will rise by the time the contract expires in
September.

By August, the price of gold increases by $2 to $352 per ounce and Joe decides
to sell the contract in order to realize a profit. The 1,000 ounce contract would
now be worth $352,000 and the profit would be $2,000. Given the very high
leverage (remember the initial margin was $2,000), by going long, Joe made a
100% profit!

Of course, the opposite would be true if the price of gold per ounce had fallen by
$2. The speculator would have realized a 100% loss. It's also important to
remember that throughout the time that Joe held the contract, the margin may
have dropped below the maintenance margin level. He would, therefore, have
had to respond to several margin calls, resulting in an even bigger loss or smaller
profit.

Going Short
A speculator who goes short - that is, enters into a futures contract by agreeing
to sell and deliver the underlying at a set price - is looking to make a profit from
declining price levels. By selling high now, the contract can be repurchased in the
future at a lower price, thus generating a profit for the speculator.

Let's say that Sara did some research and came to the conclusion that the price
of oil was going to decline over the next six months. She could sell a contract
today, in November, at the current higher price, and buy it back within the next
six months after the price has declined. This strategy is called going short and is
used when speculators take advantage of a declining market.

Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude
oil contract (one contract is equivalent to 1,000 barrels) at $25 per barrel, for a

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total value of $25,000.

By March, the price of oil had reached $20 per barrel and Sara felt it was time to
cash in on her profits. As such, she bought back the contract which was valued
at $20,000. By going short, Sara made a profit of $5,000! But again, if Sara's
research had not been thorough, and she had made a different decision, her
strategy could have ended in a big loss.

Spreads
As you can see, going long and going short are positions that basically involve
the buying or selling of a contract now in order to take advantage of rising or
declining prices in the future. Another common strategy used by futures traders is
called “spreads.”

Spreads involve taking advantage of the price difference between two different
contracts of the same commodity. Spreading is considered to be one of the most
conservative forms of trading in the futures market because it is much safer than
the trading of long/short (naked) futures contracts.

There are many different types of spreads, including:

Calendar Spread - This involves the simultaneous purchase and sale of
two futures of the same type, having the same price, but different delivery
dates.

Intermarket Spread - Here the investor, with contracts of the same month,
goes long in one market and short in another market. For example, the
investor may take Short June Wheat and Long June Pork Bellies.

Inter-Exchange Spread - This is any type of spread in which each position
is created in different futures exchanges. For example, the investor may
create a position in the Chicago Board of Trade (CBOT) and the London
International Financial Futures and Options Exchange (LIFFE).

How To Trade
At the risk of repeating ourselves, it's important to note that futures trading is not
for everyone. You can invest in the futures market in a number of different ways,
but before taking the plunge, you must be sure of the amount of risk you're willing
to take. As a futures trader, you should have a solid understanding of how the
market and contracts function. You'll also need to determine how much time,
attention, and research you can dedicate to the investment. Talk to your broker
and ask questions before opening a futures account.

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Unlike traditional equity traders, futures traders are advised to only use funds that
have been earmarked as pure "risk capital"- the risks really are that high. Once
you've made the initial decision to enter the market, the next question should be
“How?” Here are three different approaches to consider:

Do It Yourself - As an investor, you can trade your own account without the
aid or advice of a broker. This involves the most risk because you become
responsible for managing funds, ordering trades, maintaining margins,
acquiring research and coming up with your own analysis of how the market
will move in relation to the commodity in which you've invested. It requires
time and complete attention to the market.

Open a Managed Account - Another way to participate in the market is by
opening a managed account, similar to an equity account. Your broker
would have the power to trade on your behalf, following conditions agreed
upon when the account was opened. This method could lessen your
financial risk because a professional would be making informed decisions
on your behalf. However, you would still be responsible for any losses
incurred as well as for margin calls. And you'd probably have to pay an
extra management fee.

Join a Commodity Pool - A third way to enter the market, and one that
offers the smallest risk, is to join a commodity pool. Like a mutual fund, the
commodity pool is a group of commodities which can be invested in. No one
person has an individual account; funds are combined with others and
traded as one. The profits and losses are directly proportionate to the
amount of money invested. By entering a commodity pool, you also gain the
opportunity to invest in diverse types of commodities. You are also not
subject to margin calls. However, it is essential that the pool be managed by
a skilled broker, because the risks of the futures market are still present in
the commodity pool.

Conclusion

Buying and selling in the futures market can seem risky and complicated. As
we've already said, futures trading is not for everyone, but it works for a wide
range of people. This tutorial has introduced you to the fundamentals of futures.
If you want to know more, talk to your broker.

Let's review the basics:

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The futures market is a global marketplace, initially created as a place for
farmers and merchants to buy and sell commodities for either spot or
future delivery. This was done to lessen the risk of both waste and
scarcity.
Rather than trade in physical commodities, futures markets buy and sell
futures contracts, which state the price per unit, type, value, quality and
quantity of the commodity in question, as well as the month the contract
expires.
The players in the futures market are hedgers and speculators. A hedger
tries to minimize risk by buying or selling now in an effort to avoid rising or
declining prices. Conversely, the speculator will try to profit from the risks
by buying or selling now in anticipation of rising or declining prices.
The CFTC and the NFA are the regulatory bodies governing and
monitoring futures markets in the U.S. It is important to know your rights.
Futures accounts are credited or debited daily depending on profits or
losses incurred. The futures market is also characterized as being
highly leveraged due to its margins; although leverage works as a double-
edged sword. It's important to understand the arithmetic of leverage when
calculating profit and loss, as well as the minimum price movements and
daily price limits at which contracts can trade.
“Going long,” “going short,” and “spreads” are the most common strategies
used when trading on the futures market.
Once you make the decision to trade in commodities, there are several
ways to participate in the futures market. All of them involve risk - some
more than others. You can trade your own account, have a managed
account or join a commodity pool.

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Futures Fundamentals

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Futures Fundamentals