Let’s take an example of you being a milk producer and you want to make deliveries to a school. You sign a contract to deliver for a number of weeks or months until a certain date. Whether the price of milk goes up or down, you will get paid the amount stated in the contract. In this manner, you will have reduced risks in case prices of maize go down. Such a principle applies to Futures Trading. This is an online financial trading instrument that involves foreseeing into the future if commodities prices will go up or flop. Traders have the opportunity to view any ongoing activity that is related to any commodity that he/she is interested in. The stock exchange rates give the buyer and seller the current standings of goods and service prices.
This is a financial treaty between two parties where an agreement is reached to purchase and sell financial instruments and/or physical goods to be delivered in the future, at a specified date and price. It is important to note that you don’t need to actually wait for the contract to expire; you could as well cancel it.
The reason why traders in the Futures market engage in contracts is to primarily reduce risks. As a financial instrument, Futures are also used to speculate. Speculators are also called brokers. Their work is to keep track of Futures prices and inform the sellers and buyers.
Requirements of Online Futures Trading
For Futures trading to take place, there has to be hedgers and speculators. Hedgers are the producers of a commodity first hand, for example, the milk producer mentioned above. A speculator may be a trader or an investor and is usually involved in contracts; signing those with expectations of going up and doing away with those that will go down in prices.
Another important aspect here novice traders need to know is to start with small amounts in investments so as to, first of all, know the trend of online futures trading. After knowing all the risks and uncertainties involved, then one can be involved in more contracts.
The Futures price is influenced by certain factors. These include;
- The current rating in the price of the commodity in the online market
- The supply and demand for the good or product.
- The rates of the money market
- The expectations on the actual commodity in terms of now and the future.
All these factors work hand in hand to ensure that the Futures price is adjusted, for example, to avoid exaggerations between the rate of the money market and the rate of the current price of the commodity.
Monitoring the prices of commodities as they are sold and bought now and how they will be valued in the future is a key component among buyers and sellers. This helps manage the supply and demand of these goods. In addition, traders engage in contracts so as to avoid risks while making transactions.