| There are many people who want to know what is | | | | what contract you want to invest in. For instance, |
| futures trading? Futures trading is simply a contract | | | | keeping with our wheat example, wheat is traded in |
| for a predetermined amount of commodities that is | | | | a standard size of 5,000 bushels of wheat. |
| established today and delivered tomorrow. This type | | | | Each 1 cent move is $50 dollar move. The minimum |
| of transaction helps those that are both buyers and | | | | move for wheat is 1/4 of a cent or $12.50 per 5,000 |
| sellers of a specific commodity by allowing to lock in | | | | bushels. As you can see, unlike stocks this makes |
| cost and have the commodity sold before it is even | | | | things easier to figure out. Stocks are based on how |
| harvested. | | | | many shares multiplied by the current stock prices so |
| Futures Trading For Speculators | | | | that sum is varied. |
| Now, in order to make market prices liquid the CFTC | | | | Better Leverage In Futures Trading |
| allowed the speculator to assist in creating tighter | | | | Leverage is a double edged sword and should be |
| price spreads between bid and ask prices. What are | | | | respected as such. Many "get rich" programs focus |
| bid and ask prices? Glad you asked. Based on the | | | | on how the large leverage can make you a large |
| perspective the bid and ask prices means the | | | | chunk of cash in a very short period of time. While |
| opposite to the both the buyer and seller. | | | | this is true, leverage can also work against you. If |
| For the buyer, the bid price means that this is the | | | | you are on the losing end, you can lose a lot of |
| market price if you are planning to sell short a | | | | money quickly. |
| commodity for the purpose to position yourself for a | | | | What do I mean by leverage? Well, in comparison to |
| downward move. For the buyer, the ask price is the | | | | stocks, you can buy one contract of wheat for |
| price in which you would buy a certain commodity. | | | | about $700-1200 dollars. That number can change |
| The opposite would be true for the seller. | | | | based on volatility,you'll need to ensure what your |
| The Role Of Futures Trading Exchanges | | | | margin is from your futures broker. Let assume |
| So the futures trading exchanges are the centralized | | | | though that the margin to place in order to secure a |
| marketplace where both the buyers and the sellers | | | | contract of wheat is $700 dollars and you are buying |
| of a specific commodity is auctioned off. By having a | | | | that contract at a price of 3.10. |
| centralized location, it provides one main auction | | | | If that price moved from 3.10 to 3.30 you would |
| gathering for those that are interested. Prices are | | | | have made .20 cents or .20 x $50 dollars which equals |
| based on exchanges. There are some commodities | | | | $1,000 dollars per contract. This can happen rather |
| that are traded at multiple exchanges like Wheat. | | | | quickly depending on many different factors like |
| To determine the price of wheat, you first must look | | | | supply and demand or the weather. If you exit this |
| at the exchange to see what the price is at that | | | | trade you receive your margin money of $700 dollars |
| particular exchange. Although most prices are around | | | | plus the profits of $1,000 dollars. In retrospect if you |
| the same general area, you want to ensure that if | | | | bought the minimum amount of shares to trade |
| you are trading Chicago Board Of Trade Wheat, you | | | | which is 100 shares of a $20 dollar stock, you would |
| want CBOT wheat prices and not the Minneapolis | | | | pay $2000 dollars to establish your position. If the |
| exchange price. | | | | stock moved from $20 dollars to $25 dollars you |
| These exchanges are also important as this is where | | | | profit would be $5 dollars multiplied by 100 or 500 |
| the prices for electronic futures trading originates. | | | | dollars. |
| Now, since many traders trade exclusively via | | | | Seems somewhat close to our futures trade right? |
| electronic trading, real time data can be fed to | | | | The answer is no. In futures, you risked only $700 |
| investors easily since the information is originating | | | | dollars to make $1000 dollars while in stocks you |
| from a centralized location. | | | | risked $2000 dollars to make $500 dollars. See the |
| Standardized Futures Contracts | | | | power of leverage! |
| As mentioned in the beginning paragraph, futures | | | | So now that you that you understand what is |
| trading uses standardized contracts for commodities | | | | futures trading, you can make your decision whether |
| that trade. This makes things easier when calculating | | | | it is more advantageous for you to invest in futures |
| what your potential profits and losses when analyzing | | | | or stocks. |