To learn more, visit: www.tradetofreedom.comWhat Heck is a Futures Contract?
Lots of people talk about futures, but what are they really? Why do you care? Because trading futures, if you use right system, can be your path to great wealth.
To understand what we mean by a futures contract, let’s meet trader Bob (a buyer), who wants to purchase a widget today because he believes that widget will have more value in future. If all goes well, Bob will buy widget now, wait for price to go up, then sell widget for a small profit in a month. But where can Trader Bob obtain widget? It so happens that Trader Sam (a seller) has in his possession widget that Trader Bob wants. Trader Sam would like to sell widget today because, unlike Trader Bob, he believes that widget will have less value in future than it does today. Trader Sam is selling today because he believes that he will make more money now than if he waits to sell in a month.
So Trader Bob and Trader Sam get together and agree upon a price for widget. Trader Bob is now proud owner. If value of widget indeed increases in future, then Trader Bob can become a seller and part with widget with a profit. If value of item decreases in future then Trader Bob will have to sell widget for a loss.
This basic relationship between buyer and seller is foundation for all commerce. Futures are simply a variation on this theme, where instead of buying a widget now, Trader Bob contracts to buy widget in a few months at a fixed price. The transaction still relies on buyer believing price will go up, and seller believing price will go down.
Trading Critters
Futures traders fall into two categories: hedgers and speculators. The primary economic purpose of futures market is for hedging, which is buying or selling futures contracts to offsets risks of changing prices in cash markets. Hedge traders, such as large commercial firms that may actually take delivery of certain commodities, like coffee or wheat, use futures contracts to protect (hedge) themselves against changing cash prices.
Speculators, however, make up majority of futures traders. Speculators have no commercial interest in underlying commodity and have no interest in taking delivery of commodity. The potential for profit is what motivates speculators to trade commodity futures. Speculators buy when they believe that prices will increase and they sell when they believe that prices will fall. Futures traders using STARS would be considered speculators.