Todays current futures market is quite unlike the futures of the 19th
century. Todays future market is a worldwide one that includes
manufactured goods, financial currencies and treasury bonds, and
agricultural products.
When you speculate on futures it is not the actual good that is
speculated upon rather it is the contract for the goods that is traded
as value. Every futures contract includes a buyer and a seller. The
following is an example of a futures speculation: A farmer agrees to
deliver 1000 bushels of corn to a baker at a price of $5.00 a bushel. If
the daily price of corn futures falls to $4.00 a bushel, the farmer's
account is credited with $1000 ($5.00 — $4.00 X 1000 bushels) and the
baker's account is debited by the same amount. Futures accounts are
settled every day.
Using the above as an example this is how the contract settlement would
play out: If the price of corn futures is still at $4.00 the farmer
will have made $1000 on the futures contract and the baker will have
lost an equal amount. However, the baker can now purchase corn on the
open market at $4.00 a bushel — $1000 less than the original contract,
so the amount he lost on the futures contract is made up by the cheaper
cost of corn. Also, the farmer must sell his corn on the open market
for $4.00 a bushel, less than what he anticipated when entering the
futures contract, but the profit generated by the futures contract
makes up the difference.
Speculators profit by daily fluctuations in the futures market by
choosing to buy from the seller (buying short) or from the buyer
(buying long).
The FOREX market has advantages over the futures market. FOREX is the
largest financial market in the world. It is a liquid market and stop
orders can be executed more easily and with less slippage than in other
markets. The FOREX market is open 5 days a week, 24 hours a day.
Traders can take advantages of opportunities as they become available.
FOREX transactions are usually instantly executed. FOREX transactions
are commission free. Brokers earn money on the spread.
Some investors feel that due to built in safeguards that FOREX trading is safer than futures trading.
