Stock Market Futures refers to the trading of Futures Contracts and Options through the Futures Exchange. A Futures Exchange is an organization, which facilitates the trading of derivatives like Futures Contracts and Options. The Futures Exchange is also known as Commodities Exchange. The products that are traded through the Commodities Exchange include bonds, equities, short-term interest rates, food grains, soft, and currencies.
Futures Trading is also known as Commodities Trading. Futures Trading is not like Equity Trading. There is no ownership involved. It is a speculation on the future price movements of a particular commodity. It is like a betting that either the price will go up or go down.
How the Futures Trading Functions
Commodity producers or sellers like the wheat farmers set an agreement or contract with the buyers for the particular commodity. Both the seller and the buyer (a cereal or bread producer) consent to a fixed or set price for a fixed amount of manufacture. If the grain is plentiful, the gain goes to the buyer. If the grain is scarce, the gain goes to the farmer. The price remains the same without any relation to the actual manufactured amount that is to be sold. The speculators play a major role in Futures Trading. They offer liquidity and they carry the risks of price fluctuation. By betting on one or the other party concerned, the speculators put them in a profitable position.
Basically, there are three types of people trading in futures: The Hedgers, The Speculators, and the Floor Traders.
Hedgers: The hedgers are those individuals or companies who perform Futures Trading so that they are able to fix a known price level to fulfill the future need for buying or selling the underlying commodity. They perform this act for protecting themselves against a disadvantageous price change risk when the time for satisfying their need comes. In some transactions, some hedgers also utilize futures in order to secure a minimum margin of profit.
Speculators: The speculators have a resemblance with the stock traders. Speculators include individuals or companies who attempt to make a gain from the price fluctuations of the particular commodity. Whenever there is a speculator involved in a Futures Trade, every time there is another person who takes the contrary position or who bets against the speculator. This person may be anyone such as another speculator, or a floor trader, or a hedger.
Floor Traders: The floor trader is also termed as the “local”. They do the direct buying and selling for their own accounts on the exchange's trading floors. They are considered as a very esteemed group of traders. They are not like the Day Traders in the stock market. In order to function, the futures market needs some liquidity. The floor traders are creditable for providing that liquidity.
In many instances, futures markets trade options. A put option is the option for selling a futures contract, and a call option is the option for purchasing a futures contract.
Futures Trading is quite risky if it is not administered properly.
The following are the important Commodities Exchanges:
- Chicago Board of Trade
- Chicago Mercantile Exchange
- Eurex US
- Intercontinental Exchange
- Kansas City Board of Trade
- Minneapolis Grain Exchange
- New York Mercantile Exchange
- New York Board of Trade
- National Stock Exchange of India
- Commodities and Metal Exchange Nepal