Commodity Futures Trading – An Overview

Futures trading are the trading of future contracts. Commodity future contracts are contracts made to trade the underlying commodities somewhere in the future at a fixed rate, usually in the present day rate. Like stock trading, futures are traded in specific centralized trading markets like S&P and Globex. Recently, there is a huge increase in the number of traders trading futures contracts. This can be of many reasons as

1) the simplicity of trading enabling virtually any one to trade,

2) high liquidity present in the market due to the huge volumes of trades done very day,

3) the stability of the market compared to others,

4) easy to own underlying commodity – can buy a high priced product at lower prices at the time of contract,

5) low commission rates compared to trading underlying futures stocks,

6) the ability to trade from home with reduced working capital,

7) lower initial investment needed,

8) the availability of mini futures requiring less account minimums and having narrow spreads, and

9) the presence of a variety of underlying products present on market.

There are mainly two types of futures trading contracts available in a futures market as those require a physical delivery and those require a cash settlement. The contracts which require a physical delivery are known as commodity futures and include futures for agricultural commodities like rice, wheat, sugar, oats; energy commodities like natural gas, crude oil, heating oil and others such as animals, wood etc. Futures contract which require a cash settlement are known as financial futures and involve treasury notes, bonds, mutual funds etc. The buying of futures, in the commodity futures market, is known as “going long” and selling the futures is known as “going short”. According to the trading style followed, online futures traders can be broadly classified in to two as hedgers and speculators. Hedgers are traders who trade for price certainty. Usually they are the issuer of futures contracts, who do so to tackle the potential loss at the actual trading time of the underlying commodity. Speculators are the actual traders buying, holding and selling these contracts for profit. Speculators include all types of traders; arbitragers, day traders, swing traders and position traders. Every Futures trading require a futures trading broker or futures commission merchant (FCM). A futures trading broker is an intermediate between the public trader and the futures market, who deposit a margin from the web trader to the futures trading market to make the trader a recognized one. There are two types of futures trading brokers, full-service brokers and discount brokers. A futures trading broker is responsible for maintaining the records such as each customer’s margin deposits, open futures, money balances, transaction completed etc. For providing these services futures trading brokers charge a commission fee, which varies which brokers. All these process are regularly monitored by Commodity Futures Trading Commission (CFTC), the federal agency protecting against manipulation, abuse, fraud and scams in futures commodity trading.