The Basics of Futures Trading
Futures trading involves buying and selling a contract to buy or sell a certain amount of an asset by a certain date. These are not stocks or bonds, but rather specific contracts involving physical goods and financial products like interest rates, indexes, commodities and other intangibles.
A party who buys a futures contract wants to protect themselves from price changes that might cause losses in their business. For example, an airline company might purchase a futures contract for the cost of jet fuel in order to minimize any losses that could occur due to price fluctuations. Learn more https://onlinefuturescontracts.com/
On the other hand, a party who sells a futures contract wants to make money by predicting price movement of the underlying product. For instance, if the cost of jet fuel increases, then a person who owns a futures contract for that commodity could sell it for more than he would have if he had purchased it directly from an oil producer or other seller.
The Role of Hedging in Futures Trading
Traders in the futures market are usually divided into two groups: hedgers and speculators. Hedgers are those who use futures to ensure business stability, while speculators are those who trade futures for profit.
Hedgers: These are primarily large corporations or industry insiders who are connected to the underlying asset. Hedgers have the best access to futures, and they often trade for a living.
Speculators: These are full-time professional traders and individual day traders, but they also include individuals with small portfolios, portfolio managers and hedge funds. They are attracted to futures because of fast price movements, liquidity and low margins.