What is the Futures Market and why would anyone want to swap it?
Wikipedia’s response is: A Futures Market is monetary exchange where people can trade Futures Contracts. Perfectly, what is a Futures Contract? A Futures Contract is a truthfully binding agreement to buy specified quantities of commodities as well as financial instruments at a specified price with delivery place at a specified time in the future.
It is important to emphasize the word Arrangement. The first important difference between the Futures Market and, mention, the Stock Market is that the Futures Market trades contracts, possibly not shares of stock. You are not buying and selling a share (or piece) of a company. A Futures Contract is an settlement between investors to trade a specific quantity of a store or financial instrument, for example , gallons of gas or simply tons of wheat.
It is fairly simple to see how commodities deliver the results. An airline, for example , agrees to purchase 100, 000 gallons of fuel for their planes at the current market price, although does not take delivery until sometime in the future.
That was so why Southwest Airlines made money when the price of fuel was initially $140/barrel and other airlines had none. They had negotiated Futures Contracts with several oil companies years earlier should the price of oil was less expensive, and waited for shipment until 2007-2008. When the price of oil is cheap just as before, they’ll be buying Futures Contracts for delivery in 2011/2012.
That’s all well and good, you say, nonetheless that’s not really using a trading system with trading strategies, the fact that negotiating.
For every Futures Contract, there is a degree of risk. Futures and options Contracts leverage risk against the value of the underlying asset.
Area acquired risk. If the price of crude fell below the rate they paid, they paid more than they had to. As well, they reduced risk because they thought that the price of oil based would go higher than their contract price. In their case, often the leverage was profitable.
Now look at the oil companies. Many people reduced risk, believing crude oil prices would crash below the contract price they negotiated with Southwest. These acquired risk because the price of oil rose higher than the exact contract (thereby losing additional revenue they could have earned). In this case, their leverage was not as good as it might have been.
Let me provide where you stop and say, I’m not Southwest Air companies. I’m an individual day trader. I don’t want to buy 80, 000 gallons of crude. How can I trade Futures?
The very Chicago Mercantile Exchange (CME), where the majority of Futures accords are traded, realized that individual investors want to trade Coins just like major institutions; individual traders want to leverage most of their risk as well. They also understand that small investors will not hazard millions of dollars on gallons of gas contracts or lots of wheat. Therefore , the CME decided to create an investment conditions that would entice individual investors to trade Futures.
Consider, as small investor, you have lots of exchanges available to you for your trading day. You can invest in large cap stocks on the NYSE, specialist stocks with the NASDAQ, ETFs – AMEX, and possible choices at the CBOT. To entice investors to trade Options contracts, the CME created an exchange that made several other exchanges pale in comparison.
First off, the CME created emini Futures designed specifically for individual investors. The e on emini means that they are traded electronically. You’ll have a trading platform right on your company desktop where your trades go to the CME. The miniature means that the contract is a smaller version of the exact contract that the larger institutions trade.
The most popular CME emini is the S&P500. This contract is based upon the S&P500 index that represents the top 500 stocks in the NYSE. The S&P500 index is price-weighted, so some of the companies have more weight or “importance” than others. (larger agencies can move the value of the index higher or lower).
And you believed that mind capital review trading Futures was just for futures like corn, wheat, rice, crude oil.
Imagine for that moment that you could trade all the top 500 stocks all at once. That would leverage risk. If one or two stocks did certainly no perform well that afternoon, you would still have 498 other futures to trade. No need to pick any specific stock. Certainly no reason to spend hours and hours doing research on stocks whether. Why? Because you are trading all of them. Of course , it would cost you a fortune to be able to trade 500 stocks at one time. Well, stock investing S&P500 emini Futures Contracts is just like trading all 525 stocks at once, for a fraction of the cost.