Trading commodities futures contracts: Hedgers and speculators
Future trading is one kind of investment, in which one investor takes a position when he thinks the price of a commodity will rise or fall in coming days. In other words, future trading involves buying or selling future contracts, which is a standardized contact between two parties, in which one party agrees to deliver a specific commodity, with a specific price, quality and quantity.
Dealers of future commodities trading are classified in two broad groups: hedgers, who seek to hedge out the risk, and speculators, who try to make profit by anticipating the movement of the price.
Hedgers
Hedgers take a position to avoid the risk of unexpected price movement. Their main target is to get protection from the loss, not to make profit by taking risk. They include consumers or producers of the products and services or the owners of the assets, who are exposed to certain types of risk, such as the interest rate risk. The producers of crops or livestock often sell futures contracts, in order to get a certain price in future, when they would sell their products. This also helps the producers to plan the costs associated with the production.
Speculators
Speculators try to make profit by anticipating the direction that prices are going to move. There are mainly three types of future commodity speculators; position traders, active traders and swing traders. Position traders hold positions for the long term, active traders or the day traders enter more than one trade during the day and close out their positions at the end of the day, and swing traders buy or sell at the top or bottom of the price swings. There are a large number of speculators in the oil and gold commodity futures markets.
Hedgers and speculators can trade futures of hundreds of various types of commodities including the corn, lumber, gold, cotton, steel, wheat, beef, and foreign exchange of currencies, better known as FOREX trading.
Getting Started In Futures Trading
One can easily get started trading through a commodities brokerage service and trade the Chicago Mercantile Exchange, the largest exchange for future contracts, which was founded in 1898.
And, while it is pretty easy to start trading futures, it’s important to consider the fact that Hedgers and Speculators from all over the world trade commodity futures at this market, every day. Each of these traders are actively planning how to take money from the market, this fact, in combination with the highly leveraged nature of futures contracts, means that careful consideration and planning should be put into any trade – before the trade order is given.
Related posts:
