What are futures investments anyways? Futures are contracts on certain commodities and financial instruments which have a maturation or delivery date at a point in the future. Commodities can be everyday items that you may be familiar with like wheat, gasoline, or even sugar. Financial instruments can be government bonds, equity indices, and international currencies.
Sometimes commodities investing is considered alternative investing, but future or forward contracts on commodities have existed for hundreds of years, since the Sumerians first issued tokens promising future delivery of goats.
Modern futures contracts for commodities investing are regulated and have very specific components. Futures contracts are traded on designated markets within futures exchanges. In the United States, futures investments may be transacted on markets in New York and Chicago or even Kansas and Minneapolis for certain grain futures trading.
On these futures exchanges, hedgers and speculators may buy and sell futures contracts. Hedgers are traders who use commodities investment tools to try to protect their actual cash positions in certain markets with a position in the equivalent futures market. Speculators – the majority of participants in modern futures investments – are buying or selling contracts without having an actual position in the cash market, i.e. they don’t grow wheat or buy it to make flour. They are participating in futures investment to try to make money from the price fluctuations of futures contracts.
Speculators may buy (go long) or sell (go short) a particular futures market in the hopes they may offset the position at a point before delivery or maturation for a profit. A buyer would try to sell the same contract later on for a higher price. A seller would hope to buy the same contract for a lower price. There is a substantial risk of a loss in all futures trading.
Participants might also engage in options trading, another form of futures investment. Some options are no less risky than outright futures positions. Options can also be bought or sold to try to make profits, but the obligations of buyers and sellers are a little different. The two kinds of options contracts are calls and puts.
Educate yourself about the different kinds of futures investment and be aware that there are substantial risks of a loss associated with all futures and options trading. Futures investment is not for everyone.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.