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Futures trading is trading in the future price of something. It could
be a share in a company, a commodity or a foreign exchange pairing. A
builder starting a series of new building projects knows he will need
a certain quantity of cement for the job. He won't need it all at
once. Some of it won't be needed for several months. But he still has
to cost the job so he can start advertising his houses at a certain
price and attract prospective buyers.
He may therefore purchase cement futures. He normally pays only a 10
per cent deposit on the agreed price, but the important thing is that
it guarantees a price for him, so he can work out his profit margin
and set a price for each house. If he couldn't purchase a futures
contract in cement he would be forced to gamble on the price of cement
at the various times he needed it.
The futures market in commodities covers everything from gold to pork
bellies, and trading in it by merchants and farmers is known as
"hedging". Most people who trade this market nowadays are speculators,
who quite lawfully seek to profit from the price movements of major
commodities, currencies and indices, etc, and believe they can
correctly forecast the direction of the price level.
If you choose to specialise in just two or three commodities, for
example, you can become very adept at forecasting the price movement,
taking into account various factors which influence the price, such as
the weather, shortages of materials, and so on. In the days before the
internet many people used to do this as a hobby without being able to
actually trade and make any money. Having an account with a
stockbroker involved depositing a hefty amount of money, out of the
reach of most people.
But with the internet, stockbrokers have been able to automate many of
the tasks that formerly had to be carried out manually by staff. The
costs savings that resulted were used to generate more business by
offering accounts that were largely run online through a computerised
interface and advanced, expensive software.
In spite of the initial investment needed, the cost of running these
accounts is much lower than with standard accounts. The fees charged
are therefore much lower, hence discount futures trading.
The promise of the chance to make high profits with a discount futures
trading account has to be balanced against the high risks involved.
High leverage is used to control small movements in the price with a
comparatively small amount of capital. But this means you can lose a
trade as easily as win one, and with it all the money you have risked
on that trade.
If you bear this in mind and proceed with caution then you can go on
to become very successful with futures trading. Take all the advice
you receive from your broker with a pinch of salt, and seek out
someone who is a successful financial trader and who is willing to
teach you how to be equally successful. They are around if you look
for them.
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