What Is the Definition of Futures Trading?
Futures tradings is a form of investing that is best suited for more advanced investors who have the time and funds available to devote to tracking futures movement. Because futures trading relies on predicting market swings and movement, investors who utilize futures trading need to be active and involved investors.
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History
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Futures trading dates back to the 17th century. Modern-day United States investors became heavily involved in the 19th century when futures trading of grain became popular as grain was a staple of the economy.
Because futures trading started out with its roots in agriculture products, the U.S. Department of Agriculture's U.S. Commodity Futures Trading Commission oversees the regulations surrounding futures trading.
Significance
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The Deepwater Oil Spill is an example of a disaster that could not be predicted that caused futures trading to go awry. Futures trading is significant in investing as it is a type of trade that allows investors to take big risks and potentially reap big gains.
By definition, futures trading is the agreement to trade futures contracts at a set price on a set date. A futures contract is the agreement to purchase a set amount of commodities at a set price on a specific date in the future. This means that there is some guessing involved as to how those markets will be performing once those specified dates arrive.
For example, let's say someone creates a futures contract in February 2010 to make a futures trade on oil with a high set price for July 2010 because typically oil prices rise during summer months. The investor who placed that bet many months ago could not have foreseen the May 2010 Deepwater Oil Spill that caused oil prices to go in to a state of chaos.
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Types
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There are three types of futures trading on the market.
Stock futures is futures trading as it relates to stocks.
Commodities futures deal with commodity goods such as gold and oil.
Index futures deal with index markets such as foreign trading markets.
Features
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The most beneficial features of futures trading is the ability to make good judgment calls and bets on how a market segment will move. Using historical and current data helps futures traders be more scientific.
Futures are traded by brokers on exchanges that specialize in futures trading, such as the Chicago Mercantile Exchange and the New York Stock Exchange.
Composition
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Futures are only traded for commodities. The most popular and recognized commodities that are traded on the futures market are grains, metals and foods. Additional items traded in the futures market include gold, soybeans, cattle and other goods that fluctuate in value.
Considerations
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There is one big difference between trading futures and stocks. Both stocks and futures are bets against the future worth and value of a position, but stock purchases cost the full value up front and futures trades are done off of margin.
This type of a margin trade means that only a portion of the actual amount is used to buy the futures contract. Because of this, both rewards and risk are compounded.
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References
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