The Benefits of Futures Trading

Futures trading the benefits are the hedger can pass price risk to the speculator.

The speculator can make money if the market moves in the direction the speculator expects. This, in a nutshell, is the benefit of futures trading. Of course, there are other reasons for futures trading, but they usually fall under either of the aforementioned categories.

A speculator trades the futures market because of the leverage his trade allows. This example will illustrate the leverage that can be had by the speculator. A soybean contract can be controlled by say a margin of $1000 per contract. The contract represents 5000 bushels of soybeans. A penny change in price equals $50. Soybeans can trade over a daily range of 30-cents or more. A move in the correct direction for the speculator is equal to $1500 profit. That is the positive affect of leverage. Of course, it can go the other way also.

Why Futures Trading

Why futures trading you ask? Futures trading is an economic device to shift price risk to speculators from users of the commodity and grower/makers of the commodity.

An example of why futures trading would be, a cattle-feeding operation: This business has two great unknowns that can adversely affect the business. Cattle need to be fed and then they need to be marketed. A cattle feeder can buy futures contracts on corn and lock up the price they will pay for feed. They can sell cattle futures contracts and lock up the price they will sell their cattle for. Sharp operators can guarantee themselves a profit as long as they can deliver the cattle.

The oil companies carry out a similar operation. They buy oil future contracts to lock up their cost of oil and they sell gas contracts to guarantee themselves a profitable price for the gas.

A user of copper could do a similar trade in copper.

The person taking the other side of these trades is the speculator. If they sell the contracts, they are expecting a price decline. If they buy the contracts, they are expecting a rise in price.

Speculators are taking the price risk from the hedger. If they are correct about the price direction they can make large sums of money. It they are wrong, they can lose the ranch. Millions upon millions are made each year by speculators.

The trading disasters they have been a party too are always given great press.

A user of soybeans or a grower of soybeans can buy or sell a contract and lock up the price. The user guarantees a price he can live with and the grower does the same. They have both passed off the price risk to the speculator; these are the benefits of futures trading.

There are numerous futures contracts traded on the exchanges located in Chicago, New York and London. All operate basically the same with hedgers and speculators making up the trading population. You can trade all metals, interest rates, food commodities like coco or orange juice, cattle, and hogs.

Each market is all about passing price risk from one group to another.

Futures Trading Win and Lose

Futures Trading Basics

What Are Futures?

Futures Trading FAQ

Futures Trading for Profit

Benefits of Futures Trading

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