Futures Trading

Written by Patricia Tunstall
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Futures trading has many differences from forex trading. Forex is a highly liquid, spot (cash) market for foreign currencies. Futures trading involves contracts and options based on commodities, such as coffee, grains, metals, and stock indexes. Options on futures contracts are an added twist that, like hedging, provide some insurance for the investor. The big advantage is the option buyer is never subject to margin calls. In contrast to a cash and carry transaction, futures contracts usually do not involve actual transfer of the physical goods.

The forex marketplace is the most liquid in the financial world. The market itself is unregulated, although forex brokers and firms offering services to the public are regulated in the United States. Futures trading is closely regulated in every aspect by the Commodity Futures Trading Commission (CFTC) and its overseer, the National Futures Association (NFA). A blending of the two markets occurs with foreign currency futures contracts.

Comparison of Two Marketplaces

Any person unfamiliar with the operation of the futures marketplace would undoubtedly think it aptly named--the trading pit. The noise level is high, with buyers and sellers trying to conduct business, sometimes at a frantic pace. Opening and closing prices, and cash settlement information at the end of the day, are characteristic of futures trading. Forex trading has no physical location, no exchange. The marketplace is open 24 hours a day, from Sunday evening to Friday afternoon.

Futures contracts are standardized regarding quantity, quality, and location of a commodity. Buyer and seller negotiate the price, which, in this competitive forum, is the best estimate of the supply and demand for the item globally. Price discovery--the buying/selling price--continues from opening to closing of the exchange. Both futures and forex trading respond to supply and demand. Futures, however, are a way to decrease the risk of ownership of a commodity by forwarding the price to a future date.

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