Futures Trading

Initially futures trading into being only for agricultural goods. Then it was spread to metals. Thereafter this type of trading began for foreign currencies.

However way into the middle of the 1970s the futures contracts implemented for financial securities such the equity stocks. Apparently the most ancient and biggest organized commodities exchange in the world is The Chicago Board of Trade – CBOT. This was founded in 1848. It initiated futures contracts somewhere in the 1860s.

What is futures trading? Take for instance an agriculturalist who grows sugarcane and is obviously looking towards making profit from his yield. Traditionally he would harvest the crop and sell it in the market when it is ripe.

However, there is a risk involved here – what if the price of sugar reduces at the end of the harvest, for some unforeseen reasons? Obviously his profits reduce, which in drastic cases could also be losses. So how does he safeguard himself?

So as to avoid any such risk the agriculturalist could sell his yield at a rate that is pre-determined, committing delivery on a decided convenient date. Then, no matter what the situation he is paid that amount. This way the sugarcane agriculturalist sells his yield in advance preventing a possible future loss. The risk, however, involved in such a situation is the probability of the yield fetching a very high price in comparison to the contract price pre-determined. In such a case the agriculturalist has missed an opportunity to earn higher profits.

Having explained such a situation, one can understand the notion of futures trades. It is actually buying and selling at a future date, speculating a price.