What Does "Buying Futures" Mean?
The futures markets are trading exchanges separate and different from the better known stock and bond markets. Futures trading play a big role in commodity prices. In fact, the trading is often referred to as commodity futures trading. Besides a large number of commodities, futures trade against a wide range of financial securities and instruments.
Other People Are Reading
-
Futures Contracts
-
Futures are exchange traded contracts for the future delivery of a specific commodity, financial instrument or other tradeable event. Futures contracts are standardized for quantity, quality and delivery date of the underlying instrument. For example, the corn futures contract calls for the delivery of 5,000 bushels of number 2 quality yellow corn. Contract months for delivery are March, May, July, September and December.
Buying Futures
-
Traders buy futures contracts to participate in an anticipated price increase of the underlying commodity or instrument. Futures are traded through an account with a National Futures Association registered commodity futures broker. The commodity futures exchanges provide liquid markets with low trading costs. A trader can buy a futures contract and is just required to put up a margin deposit of 5 to 10 percent of the contract value. Futures trading allows buying contracts to profit from a price increase or selling contracts to profit from a price decline. The opposite action -- selling or buying -- closes a futures trade.
-
Types of Futures
-
Futures contracts trade on a wide range of products and instruments. Commodity futures were the original futures contracts and are still important. Some of the agriculture futures include grains, orange juice, live cattle, pork bellies, milk, cheese, cocoa and sugar. Other futures types include energy contracts such as crude oil, natural gas and gasoline, metals like gold and copper, a wide range of stock market indexes and U.S. government bonds.
Potential and Risks of Futures
-
The relatively small margin deposits required to trade a futures contract provides leverage on the invested money to multiply gains or losses on the underlying commodity. As an example the gold futures contract is for 100 troy ounces of gold worth $140,000 at $1,400 per ounce for gold. With one gold futures contract, a trader controls the $140,000 worth of gold with a deposit of $6,750. For each $1.00 change in the price of gold, the trader will gain or lose $100 per contract.
-
