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• Stephen Cooper

Commodity Futures trading

Information on trading commodity futures.

What is futures trading? Such a type of trading happens when two people enter in to an agreement to buy and sell based on speculation. For example, in the commodities market, two people might speculate the price of cotton 3 months later and enter in to an agreement. Now if the price is actually more than the agreed price then the seller makes a profit and if the price is less, then the buyer benefits.

Commodity future trading is quite normal and happens in various markets. Like corn, lumber, wheat, tobacco, cotton, gold, steel, beef and others. Thousands of buyers and sellers enter in to future agreements all the time and the prices are set to a great extent by the future prices they agree upon. What price they agree upon is a good indicator of the demand for a particular commodity and the financial health of the market.

There are great advantages of futures trading as well. For example, before it started, any producer of a commodity found himself at the mercy of a dealer when it came to selling his product. The person had no idea what amount he would be able to fetch and was left completely at the mercy of the market. And if the market crashed, all his investments would have gone down the drain. Now with futures trading, the commodity producer can know beforehand, even when the materials are not ready about his revenue. So he can plan better.

Commodity future trading began in 1878 when a central dealing facility was opened in Chicago, USA where farmers and dealers could deal in ‘spot’ grain. Futures trading evolved as farmers and dealers committed to buying and selling in the future.

With time, the popularity of futures trading has gone up. Only 20 years back, futures markets consisted of only a few farm products. But now futures contracts are drawn in a huge number of tradable commodities.

There are two types of futures traders.

Hedgers: A hedger is a producer of the commodity who trades a futures contract to protect himself from future price changes in his product.

Speculators: Speculators are independent floor traders and private investors. They invest in futures in the same way they might invest in stocks and shares, that is by buying at a low price and selling at a higher price.