Futures contract - Wikipedia

All kinds of people come to futures exchanges , to buy and sell futures and options contracts. They may work for banks, corporations or governments.

They may be livestock ranchers, investment managers, construction planners, farmers or food manufacturers. Really, futures trading involves just about anyone in the world who wants either to manage the risk of fluctuating prices or profit from those fluctuations. But whoever they are, and wherever they came from, these traders are interested in two types of trading: Hedgers and speculators go hand in hand — if you took one away, there simply would be no market.

Hedgers transfer risk, and speculators absorb that risk. It takes both types of traders to bring balance to the market and keep trades moving back and forth. The hedger buys futures contracts because he wants to protect himself from price swings in the future. By using futures to lock in a future price for a product, he makes his costs — and his profits — more predictable.

In other words, he trades futures to drive risk out of his business. The speculator accepts price risk in pursuit of profit. Speculators have no interest in owning the product being traded, but they are interested in the contracts for those products. Think of it like investing — buying and selling futures contracts in order to make a profit when prices move in the right direction.

People who trade futures contracts come to an exchange to hedge and speculate on the future prices of a wide range of products. Outside the exchanges, people hedge and speculate on all sorts of everyday financial matters.

To better understand what these practices look like in the real world, take the quiz below. What does hedging and speculating look like in everyday life? See if you can tell who's doing what.

Whatever happens to next year's cocoa crop, the company has locked in a stable supply at a predictable price. Orders large inventories of hot rolled coil so that they're paid for and ready when production spikes. The factory is locking in profits by ensuring that they have the supply needed to meet impending demand.

She believes the company is poised to grow and, when it does, her returns will exceed her initial investment. He is protecting his investment by transferring risk to an insurance company willing to protect him from financial loss. These were just a few examples of how hedgers and speculators operate in everyday life.

And you know what? Any of these hedgers could act as speculators, and vice versa — it just depends on how their needs align with their appetite for risk at any point in time. Get the Basics Introduction to Derivatives Futures and Options Economics Here's Why Futures Matter to You.

Futures Products Agriculture Futures Food Prices Explained Risk Ranch Energy Futures Gas Prices Explained Today's Crude Oil Boom Financial Futures Mortgage Rates Explained.

The Wide World of Futures Traders The Exchange: How It Works Learn How to Trade Understand the Market Snapshot Study the Trading Chart Assess Market Conditions Place a Trade The Role of Technology in Futures Markets A Simple Guide to Algorithms Protecting the Futures Markets The Clearing House How to Clear a Trade The Regulatory Measures Over-the-Counter Trading.

For Educators Share Facebook Twitter Google Plus LinkedIn Email. Explore the Marketplace The Wide World of Futures Traders. A central marketplace where buyers and sellers come together to trade futures and options contracts. Meet the hedger The hedger buys futures contracts because he wants to protect himself from price swings in the future.

Meet the speculator The speculator accepts price risk in pursuit of profit.

Speculators Who Trade Commodities in Futures Contracts - dummies

Hedger or Speculator People who trade futures contracts come to an exchange to hedge and speculate on the future prices of a wide range of products. Your Results Score 0 of 7.

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The truth about speculators Speculator activity often comes under scrutiny when the markets fluctuate. Facebook Twitter Google Plus Linked In Email. Next Article The Exchange: See the Impact Mortgage Rates Explained. Presented by CME Group. Glossary About Contact Us Terms of Use.