Commodity Futures
While stories of fortunes made or lost overnight on the commodity futures markets are usually false, the futures trader, if employing a sound trading methodology can sometimes earn additional money on the commodity market and make it faster. However if that trading methodology isn’t sound the trader can have bigger losses. This is as futures contracts are highly leveraged.
Margins ( the deposit needed ) on futures contracts are even less than for stocks, as low as three p.c. On some futures contracts compared to up to fifty % for stocks. Also futures investors aren’t charged interest on the difference between the margin and the full contract worth.
The margins for futures contracts act more as a performance bond or good faith deposit while the margin for stocks is more of a loan.
Though the margin on futures contracts is fairly small, it rides the full price of the base contract as that contract falls or rises, so providing the leverage discussed earlier. Commissions levied by futures brokerages are sometimes much less than brokerage commissions for other investments.
Futures markets use the open outcry ( auction type ) method of trading making certain very public, fair, and efficient markets. And, it is much tougher to trade on insider information as so many variables affect the markets. Transactions can be finished fast which lowers the danger of dangerous market moves if you are the owner of stocks you are an owner of the company. This enables you to share in the organization’s profits, and losses, thru dividends, and increases or dips in the stock’s price. It also gives you certain voting rights with the company.
But a company can go broke, leaving you holding purposeless stock. When you sell and buy futures you are only entering into a contract and don’t essentially own anything. What you have is a pact to get a commodity or fiscal instrument ( wheat or Treasury Bonds for instance ) at a cited price at a certain date in times to come. The individual on the opposite side of the transaction has agreed to sell you that commodity or monetary instrument at that mentioned price by the stated date. If you sell a futures contract before that date you have offset your position and have either a respectable profit or loss on the trade.
The stock you purchased 3 years back is the same stock you can buy today. Futures contracts, from the other viewpoint, have really limited lives.
They are traded in a regular series of contract months called delivery months. Futures contracts have expiry dates after which no further trading for that month can occur. The September corn contract you traded last year isn’t the September corn contract you are trading this year.
Many futures contract months of the same commodity trade at the same time on the market, on occasion even years into the future. The prevailing contract is commonly known as the front month and the other contracts are called the back months. They are called back months although they’re for future months. For example, corn trades for the months of January, March, May, July, September, November and December. The prevailing contract month for corn would be September 2k and so is named the front month. The months of November and December 2k, Jan 2001, March 2001, May 2001 and July 2001 are back months even though they’re in the future and even flow into the successive year. ( this will sound confusing but it’s not particularly ) all of these months can be traded at the exact same time though almost all of the trading activity happens in the front month. When this month expires the successive contract month becomes the front month and such like. His books on learning how to trade futures markets are distributed thru Sumas World Sales Limited View them at.