Trade orders, which result from all sources and so are channeled in to the exchange-trading ground for execution, are actually the ones to determine the prices. These buy and sell orders are translated into actual purchases and sales on the trading ground.
The major function of the futures market is the transfer of risk, and increased liquidity between traders with different risk and time preferences, for instance from a hedger to a speculator. Futures trading is definitely a method used to get rid of or minimize risks that happen when the prices in the market fluctuates.
Futures contracts are exchange-traded derivatives. A futures contract is traded on a futures exchange, to buy or sell a particular underlying instrument at a particular date in the future, at a pre-set price. Futures contracts are essentially for assumption or hedging.
There are two groups of futures traders: the hedgers, who are interested in the underlying commodity and are seeking to hedge out the risk of changes in price; and the speculators, who are interested in making a profit by predicting market techniques and buying a commodity “in writing” for which they have no practical use. For example, commodities in the market can be bought today at today’s price, with the speculation of selling them at a higher price in the future.
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On the other hand, hedging protects against fluctuations in market prices. This protection is made by allowing the risks of price changes to be transferred to professional risk takers. For instance, a manufacturer can protect itself from price increases in raw materials they need by hedging in the futures market.
Hedging has two types, hedge sale and hedge purchase. A person can buy a commodity and sell futures at the same quantity as protection against fluctuation in prices when he is still holding the stock.
You might think that this is gambling, but the fact is that speculation refers to the condition of a legitimate enterprise based on the current condition of the market trends. However, it is very risky for inexperienced futures traders who try to predict the market and speculate without having enough resources or experience.
Since the prices are distributed via telecommunications network and the internet, it makes online futures trading very convenient and simple for an individual. Nowadays many brokers offer their services for trading commodity futures online. Because more risk is involved in online futures trading than stock trading, you must judge for yourself whether or not it is worth the added risk of trading commodity futures online.
Keep in mind that an investment in futures can result in losses. Past performance results does not necessarily indicate future performance results.
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