All About The Futures Market Contracts And Exchanges
Here are the basics of futures contracts. When you’re the seller of the contract you agree that you’ll supply the buyer a specfic amount of the item, it could be a physical commodity such as live cattle, coal or gas, or a financial instrument such as an index. The key point is that the price is set now but the item is delivered at a future date.
The important point to remember when trying to trade futures for a profit is that it is the current price that’s being traded and not the settlement price, which is at the future date. This means we want to be buyers of the contract if we think that the price will increase, and sellers of the contract if it looks care about it is going down.
If I purchase (or sell) a futures contract today, I don’t have to hold it until the contract expires, I have the ability to simply choose to sell it (or purchase it) in the market at the prevailing price. Futures contracts are bought and sold in the regulated environment of a futures exchange, such as the Chicago Board of Trade (CBOT) in the U.S. and the London International Futures and Options Exchange (LIFFE) in the U.K.
The futures market was originally started to help people like farmers and merchants manage the risk of their products against the potential supply and demand of the market. In farming for example when there is a bumper crop of say corn the price can fall dramatically and injured the farmer, but if they have already sold a contract at a certain price they have the ability to still get a fair price for their products.
The farmer and the merchant are often trading against each other, trying to get the ideal price at both ends of the trade. By using futures they can limit the risk of waiting until the crop is actually harvested when the supply and demand can change dramatically. It also helps them to be able to plan a head knowing what profits they have the ability to expect to obtain.
By using a form of futures contract long before harvest time both the farmer and the merchant can reduce their risks by setting the price.
The type of futures contract that you are trading is usually determined by the underlying asset, which could be either commodity based or financial based, such as stocks or bonds. This is a big change from the origins in the farming market.
The CBOT was started in 1848 for the benefit of the farmers and merchants. The exchange was to regulate both the quality and quantity of the actual crop that was being traded. Today the CBOT offers many contracts on items like wheat, silver, corn, bonds and soybeans.
In 1919, the Chicago Mercantile Exchange (CME) was created. The exchange has provided a futures market for many commodities including pork bellies & live cattle. In 1982, it introduced a futures contract on the S&P 500 stock index.
The London International Futures and Options Exchange (LIFFE) was founded in 1982. Futures markets traded on LIFFE include the FTSE100, the GILT and Short Sterling. LIFFE has experienced huge growth, over 40% a year, since it started. In 2001 a record 216 million contracts were traded, representing approximately 96 trillion in value.
The EUREX is a 100% electronic exchange and started life in 1990. At the time many other exchanges were still using the open outcry system of trading in the pits.
Currencies are also traded as futures, the dollar, pund and Euro are very heavily traded.
Trading Futures online is now very popular amongst traders because of the good leverage and liquidity available, however unless you learn how to trade correctly you can lose a lot of money fast. On the other hand well trained futures traders can make consistent daily profits by following a disciplined and well throughout trading strategy.
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