Luke Moore
by on February 6, 2020

Futures trading is essentially the process of agreeing to buy or sell a particular asset or property, in a specified quantity and price for another date in the future. Each transaction or agreement is bounded by a futures contract, which is essentially a standardized contract that is duly signed by both parties to agree on a fixed price for the buying or selling of such assets even when the date is still set several months or years later. In a futures trading arrangement, prices are typically determined depending on the current supply and demand of the asset for sale and will not be influenced even if supply and demand forces significantly change later on.

Assets that are traded in a futures trading arrangement can be actual commodities but it can also involve assets like bonds, stock indexes, currencies, and interest rates. However, most commodities that are sold under this kind of agreement are typically agricultural commodities such as; oranges, wheat, pork bellies and other similar commodities. Precious metals are also sold under the contract arrangement.

Futures trading, just like any other kind of venture, involve a lot of financial risks. Most traders rely on trend predictions of particular commodities to determine their call of action. Supposing a trader finds out that the price of oil is predicted to go up in the future, what he would do is to invest in oil now through a futures contract so that he can profit from it in the future. However, if the price is predicted to significantly drop in the coming years, then he would have to sell his assets.

The primary reason that futures trading is a popular option among many farmers and other people involved in the agricultural sector is because of the frequently changing prices of commodities. If a farmer is unsure about how much he can sell his crops for in the future, as prices could possibly go up or down, he would naturally rather sell it under a futures trading agreement to someone interested, rather than risk not earning at all in the future.

The same principle applies to the buyer of the asset; since he is unsure about market prices, he would rather buy something now and agree on set price, rather than buying supplies when the market price goes up. Since the very nature of futures trading involves risks, traders have to be ready to lose a lot of money from time to time. However, if you know how to properly analyze trends, you can achieve so much success with this type of arrangement.

Topics: investing
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