Basics of Futures Trading
A commodity futures contract is an agreement to buy or sell a particular commodity at a future date
The price and the amount of the commodity are fixed at the time of the agreement
Most contracts contemplate that the agreement will be fulfilled by actual delivery of the commodity
Some contracts allow cash settlement in lieu of delivery
Most contracts are liquidated before the delivery date
A commodity futures option gives the purchaser the right to buy or sell a particular futures contract at a future date for a particular price
With limited exceptions, commodity futures and options must be traded through an exchange by persons and firms who are registered with the CFTC
Typical Users of the Futures Markets
Most participants in the futures markets are commercial or institutional commodities producers or consumers
Most participants are “hedgers” who trade futures to maximize the value of their assets, and to reduce the risk of financial losses from price changes
Other participants are “speculators” who attempt to profit from price changes in futures contracts
Regulation of Futures Professionals
Companies and individuals who handle customer funds or give trading advice must register with the National Futures Association (NFA), a self-regulatory organization approved by the CFTC
The CFTC seeks to protect customers by requiring:
market risks and past performance to be disclosed to prospective customers;
customer funds to be kept in accounts separate from the firm’s own funds; and
customer accounts to be adjusted to reflect each trading day’s current market value at close
The CFTC also monitors registrant supervision systems, internal controls and sales practice compliance programs
The NFA provides detailed information for traders. Please visit the site for more information
Before You Purchase Commodity Futures or Options Contracts
Consider your financial experience, goals and financial resources
Know how much you can afford to lose above and beyond your initial investment.
