The commodity market offers the opportunistic financier the choice of using small quantities of their own money to control big amounts of products, including gold, currencies, and rural commodities.

A futures contract is a binding contract to supply, if you’re selling, or to take delivery, if you’re purchasing, of a particular commodity, index, bond, or currency at a destined date or cost. A futures contract can include things from the standard size quantity of wheat, oil, or a nations’s currency. The amount and date of delivery of the contract are stated, though in pretty much all cases delivery is not taken as contracts are acquired and sold for hopeful or hedging purposes.

Futures are utilized by both those who use the actual commodity and by investors. For example, in May a farmer plants some corn, but doesn’t know what corn will be selling for in November. He can sell a futures contract for November and “lock in” the future selling price today. On the other hand investors can buy a futures contract if they believe the price of a security is going to appreciate, or they can sell a futures contract if they believe the price of a security is going to decline.

Futures are typically thought of in the same class as options. While they’re both derivatives, in the sense that they derive their worth from some base security, there’s one critical difference. While options give the right, though not the need to buy or sell the essential security, a futures contract is a legally enforceable duty to purchase or sell that very same commodity. Therefore , while options restrict your loss to the price paid for that option, commodities trading can lead to a loss of your complete investment and more to meet that requirement.

Another difference between the futures and the equities markets involves the use of word margin. Although the contract sizes for currencies are large (often the equivalent of over $100,000 for a single contract), an investor does not have to buy or sell a full contract. Rather, a margin deposit on the contract is maintained, which is actually a “good faith” amount of money to ensure your obligations to the full amount of the futures contract. Minimum margin requirements vary by broker, but are typically only a fraction of the contract’s total value, and are not related to the actual price of the contract involved.

Futures trades must be made thru futures brokers, who operate both full-service and discount operations, and might be related to the stock brokerage that you already deal with. Nonetheless popular discount brokers don’t handle futures contracts.

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Filed under: Currency Trading

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