The futures contracts that are traded in the futures markets are standardized by these exchanges. Specific features of the contracts such as the nature of the underlying assets, their quantity, the pricing and the delivery date are delimited by the futures exchanges. The exchanges also specify the currency in which the transaction is to be made...
A futures market is an auction market where traders buy and sell futures contracts for delivery on a specific future date according to the terms of the contract. Futures markets are also called futures exchanges.
Well developed and effective futures markets facilitate transactions without impacting the underlying assets. These markets attract hedgers who are inclined to minimize the risk. They also encourage competition among the traders who come with varied market information and price judgment. A large number of traders participate in the buying and selling activities. These activities are based upon the global information pertaining to trends in demand and supply...
Often, some investors trade in commodity futures to get rich quickly. Such investors are prone to losing money as they take big risks which might go against them. Trading in commodity futures is risky if it is treated as merely a speculative market. It is advisable for investors to exercise patience while making investing decisions.
Commodity futures aim to transfer risks associated with the ownership of a commodity. The commodity may be anything, from wheat to a foreign currency. At the time of the futures contract, the actual commodities do not physically change hands. The contract is legally binding for the transfer of commodities at a future date, which is specified at the time of entering into the contract. Also, at that moment itself, the price at which the delivery would take place in the future, is decided...
Commodity futures trading are done in an organized futures market. Unlike other investments such as stocks and bonds, trading in futures does not involve the actual possession of the commodity. All an investor does is to speculate on the future direction of the price of that commodity...
A well organized and efficient commodities futures market is acknowledged as helpful for the price discovery of commodities that are traded in it. Such a market facilitates the offsetting of transactions without actually impacting the physical goods...
When commodity futures contracts are traded with high leverage, they fall in the high risk area and get close to speculation. However, such kind of trading can also be done using low leverage to provide favorable payoffs. This technique would place futures trading in the low risk spectrum.
The currency futures market is also used by some companies for hedging. These companies either purchase currency futures for their future payables, or sell the futures on currencies for their future receipts. Speculators may also buy or sell futures on a foreign currency as a protection against the strengthening or weakening of the US dollar. So, speculators may be able to earn profit from the rise or fall of these exchange rates.
Currency futures or forex trading are fraught with high levels of risk. A small unfavorable fluctuation in the exchange rate may result in loss of an investor’s entire deposit. Investors are advised to enter into this field only if they have in-depth knowledge of how risky this segment of financial market really is...
