Futures Fundamentals

An Introduction

What we know as the futures market of today came from some humble beginnings. Trading in futures originated in Japan during the 18th century and was primarily used for the trading of rice and silk. It wasn’t until the 1850s that the U.S. started using futures markets to buy and sell commodities such as cotton, corn and wheat.
A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something, for a set price, that a seller has not yet produced. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities—remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators.

The consensus in the investment world is that the futures market is a major financial hub, providing an outlet for intense competition among buyers and sellers and, more importantly, providing a center to manage price risks. The futures market is extremely liquid, risky, and complex by nature, but it can be understood if we break down how it functions.

While futures are not for the risk-averse, they are useful for a wide range of people. In this tutorial, you’ll learn how the futures market works, who uses futures and why, and which strategies will make you a successful trader on the futures market.