A futures market is where commodities — to be delivered some time in the future are bought and sold. These include coffee, soybeans, silk, pork bellies, rubber, fur, grains, gold, eggs and government bonds.
The rationale behind this marketplace is to allow commodity producers to sell their produce in advance of delivering them. By doing this they are able to 'hedge' ie. ensure a minimum price which they will receive, and hence secure financing from their bank.
Future trading, also known as commodity trading, is based on the principle of supply and demand. When goods are in abundance prices fall, when goods are scarce prices rise. Future trading allows both buyers and sellers to take advantage of these variances.
A speculator risks capital for a spectacular gain - on the future price that commodities will fetch on the cash market. It doesn’t matter if the price moves up, or, down - as long as it moves. Prices vary due to both internal and external influences eg weather conditions, and political change, or unrest.
The participation of these speculators increases the likelihood that a sale can be made ie. that a current market price exists. It also places into the market an additional party willing to accept risk in return for an expected margin. Relatively risk-averse producers are complemented by specialists whose livelihood is made by managing risk.
With stock and share trading, traders only sell securities which they already possess - 'short-selling' is generally prohibited. In future trading there is no such limitation, and therefore speculators can enter the market as buyers or as sellers.
In addition to speculators, both the commodity's commercial producers and commercial consumers also participate. The principal economic purpose of the future market is for these commercial participants to eliminate their risk from changing prices.
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