In this topic introduction to the futures trading, we will concentrate on very basic concepts. A FUTURE is a legally binding contract to deliver or to take delivery of asset/commodity on a specified future date of a given quality and quantity at an agreed price.
Future trading began during the ear of US civil War. Price of major commodities was very unstable in those times. In 1865 Chicago Board of Traders makes it sure that speculators fulfill their obligations by implementing two types of margin the first one was initial margin and second was the variation margin.
At that time the initial margin was paid in advance and the level of initial margin kept on a level where it can cover the daily expected loss. Variation margin was implemented to cover daily loss in actual.
Remember that the very first measures were taken for wheat.
Growth Phase of Futures Trading
In 1867 the market grows enough, at that times there was a large market in Liverpool with the name of “cargoes to arrive”. Then in 1869 Cotton Broker’s association had published the rules for Cotton Futures trading. Later in 1876, the system of the clearing was implemented by Cotton Brokers Bank which was merged into Liverpool Cotton Association in 1882.
Difference between forward contract and future contract.
Moving forward with the introduction to futures trading it is necessary to understand the difference between forward and future contract. There are four basic difference which are,
Two parties have to trust each other in the forward contract. While in futures trading collection of margin eliminates the credits.
Usually, forward contracts are made which suits both parties. While futures contracts are standardized, means every contract comprises of the same quantity, quality, and Expiry which means the same price for each contract.
Forward contract and price not made public always, while in future trading contracts prices is public.
Future contracts are not delivered they are made to cover the price difference rather than delivery, while futures contracts are delivered.
Futures Trading will add dimension to your trading as well as to your time when you learn to trade the futures. Either you choose a commodity or currency to trade, good futures trading strategy will offer you to invest for long term as well as speculate the market for short term gains. This market will increase profits dramatically for trained investors.
How do Futures Contracts work?
Orange Juice, Oil, Beef, Electricity, Natural Gas, Stock and Indices, Currencies and Commodities along with many other new products are the part of futures trading product list. In reality, it is a long list to choose from.
For Example, if you are a grower then you could either grow the commodity and sell it in the market on the current rate. The real price will be when you harvest it. A future contract in the futures trading allows you to lock in a price now by selling a future contract of your desired quantity. In this case, you will know the price of your commodity and can overcome future uncertainty.
There are always two sides like when you harvest you will deliver on the same rate that was agreed at the time of contract selling. If the price falls due to unforeseen reasons you will never suffer loss. But if there is a disaster and all over the country overall output remains to lower the price will increase that brings loss for you.
Hopefully until now in response to the introduction to the futures trading, you learn the purpose of the future contract.
Participants of Futures Trading
There are three types of participants in this market the very first one is hedgers whom we call growers.
The second one is investors who take benefit of price change over time. Like if an investor bought a contract today on the expectation that the prices will rise then in the future if the price increased then he will earn the difference. There will be robust profits if the price increased but always in case of the price fall the investor will suffer from the loss.
The third participant is hedgers they enter to take benefit of quick price movements and they always become a reason for whipsaws and spikes.
In future trading market future contracts are standardized that means the same thing and price for everyone. Partial close is not possible for these. But margin makes it possible to hold a contract with the fractional cost.
Role of Clearing Members in Futures Trading
IN futures trading market there are clearing members whom we call brokers most of the time who manage the transfer of payments between a seller and buyers. Usually, these are large financial service providers and banks. A participant’s ability to trade depends on the clearing member as clearing members guarantee each trade and expect good faith from traders as well.
Exchange Traded Future Contracts
There are some specific future exchanges from which contracts are widely traded around the world. And those exchanges have the representative office all over the world and offering the products through different brokers and platform.
- Futures Trading
- Equity Index Futures
- Treasury Futures
- Energy and Metal Futures
- Commodity Futures
- Forex Futures
- AEX – Amsterdam Exchange
- AMEX – American Stock Exchange
- ASX – Australian Stock Exchange
- CBOE – Chicago Board Options Exchange
- CBOT / eCBOT – Part of the CME Group
- CFE – CBOE Futures Exchange
- CME – Chicago Mercantile Exchange
- DGCX – Dubai Gold and Commodity Exchange
- DME – Dubai Mercantile Exchange
- EDX – Equity Derivatives Market
- EUREX Euronext Amsterdam Euronext Brussels Euronext
- LIFFE Euronext Paris
- FWB – Frankfurt Stock Exchange
- HKEX – Hong Kong Futures Exchange
- HSE – Hong Kong Stock Exchange
- ICE – Intercontinental Exchange
- IDEM – Italian Derivative Exchange Market
- IMAREX – International Maritime Exchange
- LME – London Metal Exchange*
- LSE – London Stock Exchange
- ME – Montreal Exchange
- MEFF – Spanish Futures Exchange
- NASDAQ NASDAQ OMX NYBOT – New York Board of Trade
- NYSE – New York Stock Exchange
- SAFEX – South African Futures Exchange
- SFE – Sydney Futures Exchange
- SGX – Singapore Futures Exchange
- TOCOM – Tokyo Commodity Exchange
- TSX – Toronto Stock Exchange
The most prime benefit is that futures trading market is a highly regulated market and specially built for the commodity traders and open to investors and speculators. Every participant can use his strategy to earn his share. Fees related to the transaction and services are transparent.
Today’s electronic future exchanges make it easy for every participant to trade round the clock. This is the reason modern form of trading is more appealing to today’s well educated and sophisticated investors.