Who Are Involved In Futures Trading?

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Futures trading is one of the lucrative investment opportunities that many business men took advantage of quite early in its development. What attracted many traders in this market was the fact they did not require to buy or sell physical commodities such as gold, wheat or corn but only involved paper contract for holding the commodity. The investment was purely in paper so long as the traders exited the contract prior to the delivery date. This is where the futures investment and trading all begun and currently almost 97 % of futures trading is carried out by speculators.

Futures trading comprises of two major types of traders namely hedgers and speculators. The work of a hedger is to produce the commodity and this might include a farmer, a mining company or even an oil company, and then trades a futures contact to ensure that they are cushioned from the future price changes of the product. An example is that of a wheat farmer who sells a futures contract if he foresees that the price of wheat is likely to fall at harvest time. If this happens he will ultimately reap profits by exiting trade through buying at a lower price. Other categories of hedgers of futures contracts include insurance companies, banks as well as pension fund companies who use futures fund to cushion them from fluctuations in the price of their commodities at future dates.

Speculators also come in handy and these are independent floor traders and private investors. They usually don't have any connection with cash commodities but their work is to simply make profits through buying those futures contracts they speculate will rise in price and selling futures contracts they expect to fall in price. Simply put, their work is to invest in futures much the same way they would in shares and stocks by buying at a lower price and later selling at a higher price.