An Introduction to Futures & Commodity Trading

Futures trading are the trading of contracts called futures contracts, which provides the owner the power to trade the underlying commodity at somewhere in the future for a fixed rate. The rate is usually the price rate of the contract creation. Like stocks and options trading, futures trades are done in precise centralized futures commodity trading markets like Globex and S&P.

Futures trading is becoming more and more popular, this may be because of a lot of reasons such as; simplicity in trading enabling virtually any one to trade, more liquidity of the market due to the high volume of trades done each day, the stability of market as a result of high liquidity, price stabilization between markets mostly because of arbitragers, easy in owning underlying commodity product rather than looking for reduced price values, low transfer rates imposed by trading brokers, the easy to go short or long at any time, requirement of comparatively small initial investments, easy to set up an account and trade from home, availability of mini, standard or large futures contracts, and the availability of a variety of underlying products and commodities.

Futures contracts are mainly of two types as commodity futures contracts and financial futures contracts. Commodity futures contracts are contracts which end with a physical delivery. They include agricultural commodity futures like rice, sugar, wheat, oats, soybeans etc; energy commodity futures like heating oil, crude oil, natural gas, etc; metals & stones like gold, silver, diamond etc; and others such as animals, wood etc. Financial futures contracts are contracts which end with a cash settlement. They include futures for treasury notes, mutual funds, bonds etc.

Commodity futures trading involves to steps as ‘short’ and ‘long’. ‘Going long’ means buying a contract and ‘going short’ means selling a contract. Like futures contract, futures traders can also be grouped into two large categories as Hedgers and Speculators. Hedgers are the issuers of futures contracts, doing so to tackle the risk of low price at the actual product delivery time. Speculators are the actual futures traders trading for profit. Speculators include all types of futures traders you see around like futures day traders, futures swing traders, futures position traders etc.

The two basic necessities of futures trading are the money and the trading account from a futures trading broker or Futures Commission Merchant (FCM). The initial capital investment changes according to the type of the contract you are trading, to the method of trading you follows and to the account features of futures trading broker. Simply speaking, a futures trading broker is the mediator between the trader and the futures market, who deposits the margin collected from traders to the trading market to make the trader a qualified one.

The two types of futures trading brokers are full-service brokers and discount futures trading brokers. Irrespective of the type they are responsible for maintaining trader records such as the trader’s margin deposits, money balances, open futures and transaction completed. In return of these services provided the futures trading broker will charge a fee, depending up on the trading frequency, trading volume and account status of the futures trader. In USA all these futures trading process is monitored by the federal agency Commodity Futures Trading Commission (CFTC).

About the Author

Praveen Ortec works for NobleTrading.com, an online day trading broker offering discount online futures trading on 3 different online futures trading systems.