In the United States,
trading futures began in the mid-19th century with the establishment of central grain markets where farmers could sell their products either for immediate delivery – called the spot or cash market – or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner of today’s exchange-traded futures contracts. Both forward contracts and futures contracts are legal agreements to buy or sell an asset at a specific point in time. While forward contracts are negotiated directly between a buyer and a seller and settlement terms may vary from contract to contract, a futures contract is facilitated through a futures exchange and is standardized according to quality, quantity, delivery time and place. The only remaining variable is price, which is discovered through an auction-like process that occurs on various exchange trading floors or via an electronic trading platform.
Although trading began with floor trading of traditional agricultural commodities such as grains and livestock,
exchange-traded futures have expanded to include metals, energy, currencies, equity indexes and interest rate products, all of which are also traded electronically.
Who Trades Futures?
Conventionally, traders are divided into two main categories, hedgers and speculators: hedgers and speculators.
Hedgers use the futures market to manage price risk. They have a position in the underlying commodity and use futures to reduce or limit the risk associated with an adverse price change. For example, farmers often sell futures on the crops they raise to hedge against a drop in commodity prices. Similarly, consumers such as food processing plants often buy futures to secure the costs of those same crops. Other examples include: airlines hedging fuel costs or jewelry manufacturers hedging the cost of gold and silver.
Speculators include individuals trading their own funds, portfolio managers, proprietary trading firms, hedge funds and market makers. While futures help hedgers manage their exposure to price risk, speculators on the other hand accept that risk in an attempt to profit from favorable price movement. And while hedgers use the futures market to manage price risk, the market would not be possible without the participation of speculators. They provide the bulk of market liquidity which allows the hedger to enter and exit the market in an efficient manner.
Why Trade Futures?
Futures provide a fast and cost-effective way for you to access financial and commodity markets around the clock. Increased interest in global markets has accelerated media attention and attracted the interest of traders from around the world. From their study of the markets, traders develop a perspective on the direction of commodity prices, energy prices, metal prices, currencies, interest rates and stock indexes. Exchanges in the United States and other countries offer products across all major asset classes giving traders direct and transparent methods to act on their insights and participate in market trends.
Excerpted from:
https://www.cmegroup.com/education/files/a-traders-guide-to-futures.pdf
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Disclaimer - Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.