Futures

A futures contract describes the purchase or sale of a commodity financial instrument or index at a fixed price at a fixed date in the future.

Futures contracts were originally invented to allow those who regularly buy and sell goods to protect themselves against future changes in the price of goods. In other words the futures markets evolved to allow producers or consumers to hedge their risk.

Put another way a producer of sugar may know he is going to deliver a consignment of the commodity in three months time at Liverpool Docks. He knows the price he might receive now but not the price that will be available to him when he delivers the goods. By using the futures market he can lock in now to a price for the goods he will deliver later.

Equally a consumer of the sugar let us say a large supermarket knows it will need sugar in three months time. But it does not know what the prevailing market price will be at that time. This is a nuisance because it would like to know with certainty. The answer for the supermarket is to use the futures market to lock in to a purchase price now.

Of course all players in the futures markets are producers and consumers. There are also speculators. They give liquidity to the market and try and make money by betting on the future direction of prices. Sometimes these futures traders make a fortune. In other cases they lose their shirts and subsequently lose their jobs.

See Also Online share dealing service Stockmarket Centre

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2009-02-17 00:00:00 © Moneyextra.com