First, to understand what is involved in futures trading one needs to understand what a futures contract is. Futures contracts are financial instruments that involve the purchase or sale of an underlying instrument at a set price on a certain date. They are also sometimes known as derivatives, because their value is derived from the underlying instrument. These underlying instruments can be currencies, equities, commodities, bonds or any other financial product. For example, a contract might be to purchase 5000 oz of silver at $11/oz in March 2007. Hence in March 2007 the owner of this contract pays the seller $11 multiplied by 5000, i.e. $55,000, and in return gets 5000 oz of silver.

Futures contracts are listed on futures exchanges, such as the Chicago Mercantile Exchange in New York, and thus investors planning on futures trading use these exchanges. Just as with equities or other financial instruments the prices of futures contracts rise and fall on a minute by minute basis. Investors who are futures trading hope to buy and sell the contracts at a profit. In fact, as futures contracts are usually highly leveraged, which means that a small change in the price of the underlying asset (silver in the example above) leads to a large change in the value of the

Why Futures Trading

Why futures trading you ask?  Futures trading is an economic device to shift price risk to speculators from users of the commodity and grower/makers of the commodity.

An example of why futures trading would be, a cattle-feeding operation:  This business has two great unknowns that can adversely affect the business.  Cattle need to be fed and then they need to be marketed.  A cattle feeder can buy futures contracts on corn and lock up the price they will pay for feed.  They can sell cattle futures contracts and lock up the price they will sell their cattle for.  Sharp operators can guarantee themselves a profit as long as they can deliver the cattle.

The oil companies carry out a similar operation.  They buy oil future contracts to lock up their cost of oil and they sell gas contracts to guarantee themselves a profitable price for the gas.

A user of copper could do a similar trade in copper.

The person taking the other side of these trades is the speculator.  If they sell the contracts, they are expecting a price decline.  If they buy the contracts, they are expecting a rise in price.

Speculators are taking the price risk from the hedger.  If they are correct about the price direction they can make large sums of money.  It they are wrong, they can lose the ranch.  Millions upon millions are made each year by speculators.

The trading disasters they have been a party too are always given great press.