Futures Trading Explained

Futures trading is a form of investing that involves buying a commodity at today’s price but acquiring them at a later date. Futures trading can be a lucrative investment and if you are looking for investment opportunities then having futures trading explained to you can be of a great benefit. Many people have made substantial sums by investing in futures trading.

Futures Trading Explained

Futures trading can benefit both the buyer and seller of the commodity that the futures trading pertain to. This can also be a of a great investment benefit to those that are willing to speculate on futures. Futures investing involve a marketplace that consists of buyers and sellers who are interested in a particular commodity.

A commodity is an item that is bought and sold. Commodities typically fall into several categories. These categories include Metals, such as gold and silver or livestock such as hogs, live cattle and pork bellies and other commodities such as corn, soybeans or wheat.

The marketplace of a particular commodity such as wheat may take place in different locations throughout the country, such as commodity markets for Wheat in New York and in Chicago. When a speculator is interested in a commodity they need to determine what market area they are interested in. They they need to find out what the price of the item was at that marketplace. Then they need to speculate at what the price of the commodity will be in the market.

Futures Markets Explained

The buyer and the seller involved with the commodity deal in contracts. Contracts of a commodity consist of a set quantity of this commodity such as wheat selling at 5,000 bushels per contract. The contract between the buyer and the seller predetermines the price the commodity will sell at a later time. This locks in the price for future delivery of the commodity.

As a result of the contract the buyer is required to buy the amount set in the contract and the seller is required to deliver the amount specified in the contract. This contract can be transferred and both parties have the right to pass this obligation to another party any time before the contract expires.

This is where the investment potential comes into effect. Lets say a buyer of a contract purchases a contract at a set price and they are able to transfer the contract to someone else being willing to pay a higher price they can then make a profit on the contract. For example if a contract of wheat was to sell initially cost the buyer $50 and they are able to sell it for $80 then they have made $30 on that contract.

A speculator can make money by anticipating what price the contract will sell at and purchase low then sell at the higher price of the contract before delivery. The entire purpose of this process is to provide buyers and sellers of these commodities with a common place to sell and buy their goods. The idea of purchasing the contract before delivery gives the seller of the commodity a set price that they have sold future goods at therefore giving them a sense of security on the commodity.