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submitted: Aug 3rd 2008 | by: JamesJ.Dehoiver | Total views: 1 | Word Count: 605 | |

Contracts in the futures market are between a buyer and seller. The contract states that the seller must provide the buyer a very specific quantity of a certain item, such as cotton, oil etc, for a price agreed today, but at a date in the future.

It is important not to get confused about what the word future refers to. Futures traders are not trading future prices, we are trading today's prices, but the settlement is taking place in the future. So we buy if we think prices will increase and sell if we think prices will drop.

If I buy (or sell) a futures contract today, I don't have to hold it until the contract expires, I can simply choose to sell it (or buy it) in the market at the prevailing price. Futures contracts are bought and sold in the regulated environment of a futures exchange, such as the Chicago Board of Trade (CBOT) in the U.S. and the London International Futures and Options Exchange (LIFFE) in the U.K.

The futures market was originally started to help people like farmers and merchants manage the risk of their products against the potential supply and demand of the market. In farming for example when there is a bumper crop of say corn the price can fall dramatically and hurt the farmer, but if they have already sold a contract at a certain price they can still get a fair price for their products.

The farmer and the merchant are often trading against each other, trying to get the best price at both ends of the trade. By using futures they can limit the risk of waiting until the crop is actually harvested when the supply and demand can change dramatically. It also helps them to be able to plan a head knowing what profits they can expect to obtain.

By using a form of futures contract long before harvest time both the farmer and the merchant can reduce their risks by setting the price.

The type of futures contract that you are trading is usually determined by the underlying asset, which could be either commodity based or financial based, such as stocks or bonds. This is a big change from the origins in the farming market.

There are a number of major Futures Exchanges, The Chicago Board of Trade (CBOT) was established in 1848 to allow farmers and merchants to negotiate future prices for their produce. The main task of the exchange was to standardize the quantity and quality of the produce that was traded. CBOT now offers futures contracts on many different underlying assets, including corn, oats, soybeans, wheat, silver and Treasury bonds.

The Chicago Mercantile Exchange (CME) was created in 1919 and has managed a futures market in such things as pork bellies, live cattle and the SP500 index.

In London the big financial futures exchange is the London International Futures and Options Exchange (LIFFE). Here financial instruments such as the FTSE100, the GILT and Short Sterling are traded, the exchange is relativily new and opened in 1982.

EUREX started life as the DTB, the German futures exchange. The DTB has always been an electronic exchange and started back in 1990, when electronic exchanges were still considered to be inferior to the open outcry system.

Currencies are also traded as futures, the dollar, pund and Euro are very heavily traded.

Trading Futures online is now very popular amongst traders because of the good leverage and liquidity available, however unless you learn how to trade correctly you can lose a lot of money fast. On the other hand well trained futures traders can make consistent daily profits by following a disciplined and well throughout trading strategy.

About the Author

James J. Dehoiver is an expert futures trader and will teach you how to day trading futures as well as some delta neutral futures strategies, checkout his website now.

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