Here are the basics of futures contracts. When you are the seller of the contract you agree that you will supply the buyer a specfic amount of the item, it could be a physical commodity such as live cattle, coal or gas, or a financial instrument such as an index. The key point is that the price is set now but the item is delivered at a future date.



To make money trading futures you need to be a buyer of the contract if you think the value of the commodity is going to go up, and a seller of the contract if you think it will go down. The settlement takes place at a future date but you always have to buy and sell at todays prices.

When a contract is either bought or sold you don't have to hold it until the settlement date. It is easier to either sell or buy it when there is a profit in the trade, at the current market price. There are a number of exchanges that regulate the buying and selling of futures contracts such as the CBOT (The Chicago Board Of Trade) and the LIFFE (The London International Futures And Options Exchange.

The origins of the futures markets can be traced back to farmers and merchants who wanted method managing the risks in their business against bad weather or failed crops. The use of futures contracts helps them to maintain a more constant price for their products when the demand can vary a lot.

The use of futures in the farming industry has many benefits such as allowing the farmer to be able to plan ahead as he already knows what kind of profit he can expect from his crop of say coffee beans. The price may not be the best and the merchant may make a killing but the risk is reduced.

By using a form of futures contract long before harvest time both the farmer and the merchant can reduce their risks by setting the price.

The type of futures contract that you are trading is usually determined by the underlying asset, which could be either commodity based or financial based, such as stocks or bonds. This is a big change from the origins in the farming market.

The CBOT was started in 1848 for the benefit of the farmers and merchants. The exchange was to regulate both the quality and quantity of the actual crop that was being traded. Today the CBOT offers many contracts on items like wheat, silver, corn, bonds and soybeans.

The CME was started in 1919, it's main purpose was to enable a futures market in such items as pork bellies and live cattle. Today it also regulates the S&P500 stock index which is a very popular index for traders, including day traders.

Another large futures exchange is the London International Futures and Options Exchange (LIFFE) which started in 1982. It has grown very fast since then and financial products like the FTSE100, the GILT and Short Sterling trade on that exchange.

The EUREX is a 100% electronic exchange and started life in 1990. At the time many other exchanges were still using the open outcry system of trading in the pits.

One of the biggest futures markets in the world was the German Bund, which, during the first half of the 90's, was the biggest contract traded on LIFFE. The Bund pit on the floor of LIFFE was the biggest and the most active, it was the heart of the trading floor. The Bund was also traded on the DTB, but in much smaller quantities.

Many markets in futures have very high volumes and hence very good liquidity, these are attractive markets for traders. The high leverage means that profits can be made very fast when the market moves, however money can also be lost very fast. If you are even thinking of trading futures make sure that you learn as much as you can before using real money.