Futures trading, the trading of futures contracts, begin in mid 18th century in Holland and in Japan. United States joined the party in 1840 by establishing a centralized commodity market, which provided the access to both sport commodity delivery and commodity futures contracts.
At the beginning, the common commodity products like grains (wheat, rice, etc), some meat and live stocks are only available for trading. Later with the popularity and the developments in futures trading more products such as metals (gold, silver, etc), energy products (crude oil, gasoline, natural gas, etc), stocks and stock indexes, currencies and currency indexes, and government as well as private interest rates became available for trading. It is the Chicago Mercantile Exchange (CME), which is greatly honored for the introduction of financial futures or money futures, in 1970s; which soon became the most widely traded futures contract type.
Futures trading are different from spot trading in many respects; in fact, they are virtually opposite to one another. Spot trading, as the name indicate, requires Ëœon the spot product delivery and are done for the real-time price at the time of delivery. One the other hand, the main objective of futures trading is to hedge the uncertainty of price at the time of product delivery, which often happens after 3 months or 6 months interval. Futures trades are done for the price specified at the time of contract issuing. But the trading of futures contracts, which expire by next month of so is often known as spot trading.
Both features contracts and forward contracts are much similar to one another and often are used interchangeably. The only difference is that forward contracts are traded over-the-counter; through broker dealer interactions by ask bid trading. Futures contracts trading are done by open outcry of screen in public domain (through centralized futures trading markets). All futures contracts are unchangeable, which contain the information about the product delivery time (the expiration date) and the price of the product. They are guaranteed by the clearing houses and are margined for minimizing counterparty credit risks.
The most common type of futures is the commodity futures, in which the underlying product is agricultural, livestock or other natural commodity. Financial futures have financial products like bonds, IRAs and treasury notes as underlying product. Stock futures are futures contracts having stock as underlying product, and stock index futures are made to hedge stock market fluctuations. Similarly currency futures are traded for buying or selling specified currency or currencies at specific rates in future. Future options are also a favorite product, which gives the holder the right, not the obligation, to buy or sell futures contracts at a specific time for a specific price.
About the Author
Praveen Ortec works for NobleTrading.com, an online day trading broker offering direct access online futures trading on 3 different futures trading systems.
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