Futures trading or commodity
trading first started in Japan and in Holland, somewhere in 18th century. In
US, commodity trading started by establishing a commodity market place in 1840s
century. The market offered both sport delivery and futures contracts. Futures
trading differ from spot trading in different aspects. Spot trades are done for
actual (and real-time) cash/product deliveries but futures are traded for
hedging possible price uncertainties. Spot trades are done usually with a
two-day cash delivery method where futures trades are done for usually 3 months
durations. The futures trades for contracts which expire by next month or less
is also often called spot trades.
The first products available for
futures trading include meat, grains and live stocks. Later futures contracts
for a variety of products were implemented including those for energy products,
metals, currencies and currency indexes, stocks and stock indexes, and private
and government interest rates. The CME (Chicago Mercantile Exchange) is
responsible for the introduction financial features in 1970s, which very soon
became the most traded futures type.
All futures have unchangeable
contract specifications that are guaranteed by the clearing houses and margined
to minimize counterparty credit risks. They are traded by open outcry of screen
in public domain. Futures Trading
contracts are almost similar to forward contracts, and often the names are used
interchangeably, but forward contracts are typically traded OTC
(over-the-counter) through issuer-client or broker-dealer interactions where
futures are traded through centralized markets.
Commodity futures are the most
common form of futures and are traded all over the world. With the passing of
time new and new agricultural, livestock and metal/natural commodities are
becoming available for futures trading. Futures options are, like stock
options, the right to buy or sell futures contract on a certain price at a
specific time. A call futures option is the right to buy a futures contract and
put futures option is the right to sell a futures contract.
Stock features or single-stock
features are futures contracts for owning an underlying stock. Stock features
usually have greater leverage and the holders of futures do not receive/pay any
dividends. Stock index futures are meant for multiple purposes like hedging,
trading and investing. Hedgers for owning stocks or index options, traders for
benefiting from price volatility, and investors for achieving certain goals by
not directly owning the stock.
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