A futures market is basically an auction arena where participants (investors) purchase and sell futures contracts and commodity for delivery within a defined future date. Futures are financial trade-traded derivatives instruments that lock-in future delivery of some asset or commodity at a pre-decided price determined by the seller at the time of sale. The seller pays for the contract by way of a margin payment. Futures contracts are traded in a futures market and the underlying assets traded in this market are usually futures products, although they can also be stock, bonds, commodities, currency or other financial investments.
Futures contracts trade on stock exchanges like the New York Stock Exchange (NYSE). The contracts normally specify the date, price and quantity to which the contract holder is entitled. It’s simple enough if you think about gold; the gold buyers will buy the gold as soon as the market opens for the day when the price is set and the dealers then resell gold once it has reached a determined price. With a futures market, you may buy or sell at any point up to the agreed date and time. Contracts that fall outside the purview of the futures market are generally called Counter-uayls.
Speculators are primarily the ones who participate in the futures market. Speculators use the prices as their sole basis for making investment decisions. As the name suggests, speculators play an active role in the exchange by purchasing a quantity of one commodity and selling another at a later date when the prices have risen.
Another class of participants is retail traders who trade with the intention of making money on the movements of particular stocks, currencies or indexes. These traders are usually speculators, though some are true fundamental analysts who watch the stock market for trends and make appropriate moves. Again, both types of traders have an effect on the stock futures market. Those who participate actively in the stock market are called ‘speculators’ while those who are less active but nevertheless still take an interest in its movements are called ‘moderators’.
Large companies, banks, and other large organizations are the largest users of the stock market. Long-term investors buy securities based on the company’s potential for growth over the future years. They are usually interested in the financial statements of the company, as well as its management team and board of directors.. The primary purpose of buying securities is to protect the organization from external risks such as natural disasters, inflation, terrorism, equity markets, and other events. For example, many large U.S. corporations (e.g., AT&T, Microsoft, etc.) purchase long-term securities such as U.S. Treasuries, Notes, and other products that will give them financial strength in the event of a downturn in the economy.
Short-term traders, as the name implies, trade standardized futures contracts. They invest more of their money in commodities, energy, and related products. Since they buy and sell standardized futures contracts only during specific periods, short-term traders are more likely to become involved in a particular company because of its success or failure. For example, if an energy company reports that it will produce X number of barrels per day in the next few months, and the price increases after the release of this news, short-term traders will take the oil futures contract they own and sell it before the expiration date in order to take advantage of the increased price.
Importers/exporters are different from speculators, in that they do not usually “hold” a commodity. Instead, they engage in buying and selling commodities in order to gain access to futures prices. This is how speculators make their profits. Importers can create a position in the futures market by purchasing commodities at prices higher than their cost and selling them at futures prices lower than their cost. The reason why the prices they pay for the commodity are higher than their cost is because they bear more risk. On the other hand, if the price drops below what they paid for the commodity, they will be in a negative cash position.
In summary, there are three major types of futures market participants: speculators, open-swell agents, and importers/exporters. Each type has distinct characteristics including the amount of risk they are exposed to, the way they buy and sell their commodity, and the way the market price moves with the changes in the futures market to date. No matter which type of participant you choose, you must be knowledgeable about the characteristics of the futures contracts you are trading, and the rules governing your position.
