Sunday, April 15, 2007

Futures, forex and options, oh my!

I think that I understand the commodity futures market. I could be totally wrong, so I do not invest in futures. Below is my explanation of commodity futures trading. Please comment if you wish to take me to task for my explanation.

For those people savvy enough to fully understand and track the commodity market, there is something called futures trading. Basically, you are investing today to offset future prices of a commodity. If you buy x-quantity of y-futures at $1.39 per pound, and the price increases to $2.39 per pound, you may take delivery of your x-quantity of commodity at $1.39 per pound. You do not pay brokerage commissions or full investment value until you take delivery of the commodity.

There are usually two basic groups of futures traders, hedgers and speculators. Hedgers use futures for protection against increases in future prices of the underlying cash commodity. The rationale of hedging is based upon the tendency of cash prices and futures values to rise and fall together. Hedgers are usually companies that deal in the underlying cash commodity. If prices rise, the company must pay more for the commodity. For protection against price increases in the future, the company hedges, or buys enough futures contracts, to cover the amount of commodity the company expects to buy at the lower ($1.39 above) price. Since cash prices and futures prices usually rise and fall in price together, the futures position will profit IF commodity prices rise enough to offset cash commodity losses.

Speculators are the second major group of futures investors. These individuals include independent floor traders and investors. For speculators, futures have important advantages over other investments. If the speculator knows what s/he is doing, s/he can make more money in the futures market more quickly than in real estate or stocks, because futures prices tend to change more rapidly than other investments. However, futures markets can cause greater losses because futures are highly leveraged investments. The trader only pays up a small fraction of the value of the underlying contract as margin, yet rides on the full value of the futures contract as it moves up and down. The actual value of the contract is only exchanged when delivery takes place. Commission charges on futures trades are small compared to other investments, and the investor pays them only after a futures position is liquidated.

Global Futures Exchange & Trading Co., Inc., sponsor of this post, has many tools to help you with your account. They offer 24/7 live customer support and a live simulator that you may try before you invest. You may to start your account with a minimum of $250. If you are interested or want more information, please e-mail GlobalFutures@GlobalFutures.com.

Note: There is risk of loss trading futures, options and forex.

2 comments:

Jess said...

Thanks for writing about this! I had to actually do some research on forex trading and all that. Very interesting.

CyberCelt said...

@jess-I had to do some research, too. Figures that I would pull the futures link instead of Forex, about which I know something.

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