Many people have the idea that commodity futures trading is quite difficult to understand. It might only appear difficult when you are new to futures trading, but once you know the internal workings and get yourself a hang of it, you will be well on the way to success.
Folks have a common misconception that commodity exchanges determine or establish the costs of which commodity futures are procured and sold. This is simply not true. Prices are dependant on demand and offer conditions. Just remember that if there are even more buyers than sellers, prices will end up being versa forced up and vice.
Trade orders, which result from all sources and so are channeled in to the exchange-trading ground for execution, are actually the types to determine the prices. These buy and sell orders are translated into actual purchases and sales on the trading floor.
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 a method used to eliminate or minimize risks that occur 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 certain underlying instrument at a certain date in the future, at a pre-set price. Futures contracts are basically 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 moves and buying a commodity “on paper” 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.
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 safety against fluctuation in prices when he’s still holding the share.
You may think that is gambling, but the simple truth is that speculation identifies the condition of the best business based on the existing condition of the marketplace trends. Nevertheless, it is very dangerous for inexperienced futures investors who make an effort to predict the marketplace and speculate without having enough resources or experience.
Since the prices are distributed via telecommunications network and the internet, it makes on the web futures trading very easy and convenient for a person. Many brokers give their providers for trading commodity futures on the web nowadays. Because even more risk is involved with on the web futures trading than trading, you need to judge for yourself whether it is worthy of the added threat of trading commodity futures on the web.
Remember that an purchase in futures can lead to losses. Past performance outcomes will not indicate future performance outcomes.