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Our modern futures market emerged in the 19th century when farmers began selling contracts to deliver agricultural products at a later time. They did this to anticipate market needs and balance supply and demand in the off-season.
The futures market has changed significantly since then, and today the futures market is no longer limited to agricultural commodities. This worldwide commodity market now includes things like manufactured goods and financial products as well as agricultural products. A futures contract is a guarantee that a particular product will be sold at a fixed price on a specific date.
When speculators play the futures market, there is no expectation that the products will be delivered and even the actual commodities are not important. It is only the contracts themselves that are traded, and the value of these contracts is constantly fluctuating.
Each futures contract has two positions, a long position, and a short position. The short position is filled by the seller and the long position by the buyer. Futures accounts are settled daily.
For example, a farmer enters into a contract with a grocer to sell 1000 bushels of corn at $10 per bushel. At the end of the specified period, if the current market price of corn is $9 per bushel, the farmer will have made an extra profit of $1000 on the contract and the grocer will have made a loss of the same amount. In this case, the farmer sells his corn on the open market at $9 per bushel, but his loss is covered by the profit from the contract. The grocer will now buy his corn for $9 per bushel, but in reality, he is still paying $10 per bushel because of the cost of the contract. If he had not contracted, he could have bought his corn for $9 and saved $1000. But if the price of corn had risen significantly to $13 per bushel, he would have saved $3000.
Speculators try to predict the direction of market fluctuations and make a profit by buying and selling contracts.
FOREX
The FOREX market has many advantages over the futures market. It is much larger than the futures market as it is the largest financial market in the world. The FOREX market is also much more fluid, which makes it easier to execute stop orders with very little slippage.
While the futures market is usually open only 7 hours a day, the FOREX exchange is open 24 hours a day, 5 days a week. This extra time makes the FOREX market more fluid and allows traders to take advantage of it by trading whenever they want instead of waiting for the markets to open.
There are no commissions in FOREX trading; brokers make their profits through the spread. This is the difference between the buying price and the selling price of a currency. With futures contracts, the trader has to pay commission fees for each transaction.
Due to the extremely high trading volume on the FOREX market, most transactions are executed almost instantly, which allows for better price control of your trades. In future contracts, the price offered by the broker will be from the last transaction and your price may be significantly different.
In the futures market, debits are a constant possibility due to daily fluctuations. The FOREX exchange has many built-in safeguards in the trading system that help protect traders.
