A futures trading system is either a personally constructed way that a particular broker may do his or her business or it may be an electronic system that helps with a complicated day to day exchanging of futures. Futures are very widely traded commodities of natural resources. Coffee, oil, currency in the form of bullion, sugar, wheat and many other products that come from the earth are all commodities. Investors gamble on whether or not there will be shortages, windfalls, and how much the price of these commodities will be on a certain future date. An investor may have developed his own commodities system that has served him well for many years. This system that is known only to him may have made this broker a great deal of money, but this proprietary system will have to have worked inside the much larger commodities exchange market that has its own culture and set of rules. Let's see how a commodity market works: A large banana plantation owner in Costa Rica buys a banana futures contract for twenty one cents a pound that comes due three month from today. The owner believes that while the current going rate is seventeen cents a pound, a new interest from China in his product will push the price upward another four cents by the time the three months is over. Another investor, also into buying all sorts of commodities from Central America, buys that futures contract of bananas, believing that the price will even go higher in the months to come. Should the price actually slide lower, the plantation owner still makes a profit and the buyer of the contract loses. Should the price go higher, the contract buyer makes money while the owner loses out on more profit. This is a very simplified version of the futures trading system.
A futures trading system is built on two types of traders: speculators and hedgers. While hedge traders are actually interested in whatever product is being traded, speculators are only interested in making a profit through buying and selling of commodity contracts. Hedgers work within the futures trading system to secure a future price, sometimes several months down the road for the product. Hedging helps protect against price risks. The holders of the commodities contracts are in the long position and are typically the buyers of the commodity, while the sellers of the commodity are in the short position. Futures traders are always trying to guess about what is going to happen in the future, but one thing is for certain: "It is appointed unto men once to die, but after this the judgment." (Hebrews 9:27) Only a person who has committed their life to Jesus Christ can look forward to that judgment with certainty.
Most people have seen television pictures of the trading floors of some of the futures trading system exchanges based in Chicago or New York. The traders work in what are called pits which are just large rings with steps along the side where traders stand and face each other. The people trading must be members of that particular futures trading system exchange while non-members are stuck trading through brokers who are members of the particular exchange in question. On the floor of these exchanges are the computers, monitors that report current prices and banks of phones that so many of us are used to seeing in the television pictures. Employees of the exchange walk the floors of the pit constantly to make sure that all trades are under the guideline of federal commodity trading regulations.
At the end of each day, traders have a tally sheet that tells them how much money was made or lost. At the beginning of every day the trader must have a certain amount of money in his account to absorb losses that might occur. This amount of money that must be in the account is called a margin. If the losses exceed the money in the account, the futures trading system will give a margin call to the trader, asking for that margin to be replenished. Failure to do so will end that trader's ability to continue working on the floor.
There is a great deal of money that can be won or lost in commodities trading and not only a lot of money, but also the gains or losses can mount up quite quickly. Much more quickly than typically in the stock market. The reason is that in a futures trading system, futures are able to be traded with very little money. This is called leverage, and the trader can trade for one hundred thousand dollars worth of product for as little as ten thousand dollars that is put up as a performance bond. This performance bond is what was discussed as the margin in the last paragraph. Since the transaction can take place in the matter of a few seconds, there is less risk of quick market moves to affect the outcome of the trade.
There are times when traders, in the midst of all the shouting and the back and forth action between them, can disagree as to what was said on the floor. In cases like this, the exchange will not allow these traders back on the floor until the dispute is resolved. Issues like the agreed price might actually be in dispute. The open air exchange of the commodity trading floor might seem archaic and clunky to some, but its supporters maintain that it is the best way to keep trading at an above board level. The lure of big and quick money might entice some people to try futures trading, but the advice here is to really know the business inside and out before trying it for real. There is just too much money that can be lost too quickly for an amateur to be dabbling in the futures game.
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