The futures markets are one of the most heavily traded areas of the financial markets on the whole, providing a vast degree of opportunity for speculators and investors alike to derive a profit on their trading activity. Traded on margin and with high degrees of leverage almost as a rule, the futures markets are strongly volatile, with the capacity to swing wildly in one direction or the other – to the delight or detriment of the exposed trader.
In general terms, the futures markets work like many other markets. Crucially, the distinction between futures and, say, contracts for difference (visit http://www.independentinvestor.com/cfd/guide if you’re not sure about CFDs and how they work), is that futures actually have a practical upshot in the form of guaranteeing raw material prices. This is good for both raw material producers and the manufacturers that rely on them, and these commodity goods are the perfectly type of product to be traded in a financial market set up. The futures market works by determining a market price that represents the intersection of supply and demand at any given point, and reflects these contrary pressures by increasing and decreasing prices accordingly as a result of buying and selling activity.
Who Trades The Futures Markets?
The futures markets are traded in large part by three main groups: investors, manufacturers and investment funds. Each of these three categories trade the futures markets differently and has different needs, wants and requirements from their futures market trading. Initially, investors trade on the futures markets to make a profit, usually over the short term, thanks to the margined, leveraged trading on offer across the market. Investors have no interest beyond price speculation in the performance of the markets, and are free to move from one market to the other, from bull to bear, in order to make any return they can. Investment funds have similar interests in the markets, although they tend to employ more diverse and altogether different investment strategies to individual price speculators, albeit with the same objective in mind.
The third group of futures market traders who factor in to shaping the direction and movement of the markets is manufacturers – essentially any organisation or business that requires commodity raw materials for a critical business process. These bodies have no choice but to invest in the futures market or to take prices as they are when they demand produce – a dangerous state of affairs for any manufacturing business without the flexibility to drive up prices accordingly.
Together, all three groups make up the bulk of futures market trade, and while all three have different objectives, they are all still out to maximise value for themselves and their own position. As a result, capitalising on a market where everyone is trading with disparate aims and motivations is difficult, but is emotionally and financially rewarding for those that get it right. While most traders will fall into the category of an individual investor themselves, it’s important that they consider the trading behaviour of larger funds and manufacturers, who usually have a much greater power to shape the market and the prices of different futures contracts.
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Article by Tim Messenger – www.independentinvestor.com