In the futures markets, people, institutions, and governments sometimes transact with each other products for price hedging and speculating, trying to make (or save) money.
An airline, for example, may want to use futures to enter into an agreement with a company to buy a fixed fuel jet fuel at a fixed price for a fixed period of time amount. This transaction in the futures market allows the airline to cover the risk of volatility associated with the price of jet fuel.
Although business users are the main actors in the field of futures, traders and investors also use the futures market to profit from price volatility through various trading techniques.
One of these trading techniques is arbitration, which takes advantage of price discrepancies between different futures markets. For example, in an arbitrage trade, you buy and sell the futures contract crude oil simultaneously on different trading venues in order to capture price discrepancies between these locations.
Futures markets are administered by the various commodity exchanges such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
Investing through futures markets requires a good understanding of futures contracts, options on futures, forwards, spreads, and other products.
The most direct way of investing in futures markets is to open an account with a default utures f c m erchant (FCM). The FCM is much like a traditional brokerage house values (such as Schwab, Fidelity or Merrill Lynch), except that you are allowed to offer listed on the futures market products. Here are some other ways to participate in future:
- Advisory trading commodities (CTA) The CTA is an individual or company licensed to operate futures contracts on their behalf.
- Pool operator Commodities (CPO) CPO is similar to a CTA, except that the CPO can manage multiple customer funds in a single account. This sharing provides an additional boost when trading futures.
- Commodity indices: A commodity index is a benchmark similar to Dow or the S & P 500, which tracks a basket of the most liquid products. You can track the performance of a commodity index, which essentially allows you to “buy the market.” A number of commodity indices are available, including the Goldman Sachs Commodity Index and the CRB index Reuters / Jefferies.
These examples are just some of the ways to access the futures markets.
A number of organizations to regulate futures markets, including Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). These organizations monitor markets to prevent fraud and market manipulation and to protect investors from such activity.
Futures trading is not for everyone. Futures markets, contracts, and the products are very complex and require a lot of expertise in even the best investors. If you do not feel you have a good handle on all the concepts involved in futures trading, not just jumping in future – you could lose much of their capital.
If you are not comfortable trading futures, do not worry. You can invest in commodities in several other ways.