Futures Market Guide

Futures Market 

A futures contract is a legally binding contract to deliver, if you are selling, or to take delivery, if you are buying, of a specific commodity, index, bond, or currency at a predetermined date or price. A futures contract can include everything from a standard size amount of wheat, oil, or a country's currency. On the other hand investors can buy a futures contract if they believe the price of a security is going to appreciate, or they can sell a futures contract if they believe the price of a security is going to decline.

Futures are often thought of in the same category as options. While options give the right, but not the obligation to buy or sell the underlying security, a futures contract is a legally binding obligation to buy or sell that same commodity. Although the contract sizes for currencies are large (often the equivalent of over $100,000 for a single contract), an investor does not have to buy or sell a full contract. Rather, a margin deposit on the contract is maintained, which is actually a "good faith" amount of money to ensure your obligations to the full amount of the futures contract. Futures trades must be made through futures brokers, who operate both full-service and discount operations, and may be related to the stock brokerage that you already deal with.

As far back as the thirteenth and fourteenth century wool was being sold in Europe via the futures contract. Parties would contract, even then, to purchase wool at a certain price and amount at a specified date in the future. Why? The point is a simple one, futures exchanges have existed in some form for quite some time, and our current use of futures contracts are extensions of instruments pioneered quite some time ago.
By the nineteenth century, Chicago had become a center for agricultural commodities futures exchanges. This did much to calm the international currency markets as a central clearinghouse now allowed hedging against potential loss due to currency fluctuations a reality.

The average speculator trades at a far greater rate than a hedger, and thus there is a constant spin of money moving through the futures contracts. This liquidity is essential for the the futures market to function properly.
In summary, futures contracts provide stability of future prices and the attainment of good and stabilize the business market in the commodity being traded. In today's market there are futures market in oil, gold, stock indexes, currencies...the list is very long, and many of the futures contracts are extremely active. So there you have, the futures market is a large well regulated auction where price discovery and stability are achieved.