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Futures Trading – Is it for You?

What is a futures market and why are people interested in using them?

Wikipedia says: Futures Markets are financial markets where traders exchange Futures Contracts. Then what is a Futures Contract? Futures Contracts consist of legally-binding agreements for the purchase of certain quantities or financial instruments at a set price with delivery to a specific future date, check this out.

It is important to stress the contract. Futures Markets do not trade stocks, but contracts. Futures Markets are different in this respect from other markets, such as the Stock Market. The Futures Market is not the same as a stock market where one can buy or sell an actual piece of company. The Futures Contract is an arrangement between investors that allows them to exchange specific quantities of financial or commodity instruments like tons of grain or gallons gasoline.

Understanding how commodities operate is very simple. Understanding how commodities operate is very simple.

Southwest Airlines was able to make money, while all the other airlines suffered losses when oil prices were $140 a barrel. Southwest Airlines made Futures Contracts when oil was less expensive. The contracts were not delivered until 2007. The contracts for futures are being purchased now, when the price of oil is affordable.

That’s not trading at all, that’s merely negotiating.

Each Futures Contract involves some degree of risk. Futures Contracts reduce the risk of your investment by using the underlying values.

Southwest took on the risk. In the event that they did not receive their contract price, the company would have paid more. They reduced their risk at the same time, as they expected crude oil prices to rise beyond what they had contracted. The leverage was profitable.

Think about the oil firms. Southwest minimized the risks as they expected crude oil to be priced below its contract price. As oil prices rose higher than contract, Southwest lost revenue. It was due to the fact that their leverage wasn’t as high they could possibly have.

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