Scratching The Surface Of Futures Trading
Shelling out money on the stock market can not be done on a whim. It needs to be understood and studied. When you learn more about it you may also stumble upon derivatives and other investment options. You may learn about futures trading or mutual funds whatever floats your boat.
Before you get into investing or trading in the stock market, you need to have a clear understanding that you are taking a risk. Yes, you may profit from it. But, you could also incur losses.
The very basic equation to profit from the stock market is to buy low, sell high. Or, sell high then, buy low. You can even make a mantra out of it. But kidding aside, trading and investing need to be done in a calculated manner. Though, most of it is speculation, a trade analyst can make an educated guess depending on a number of factors. That is how they are able to calculate the risk tied to a fund, a company or an asset.
Now, when it comes to futures, hedging to both the seller and buyer may occur. Hedging is when you reduce risk when you invest.
When you get into a futures contract, you are entering a written agreement to invest in a specified product with a specific amount on a future date. In short, you promise to buy on a future date. The more you dig in, the more you will learn about it but for now, let us just have futures 101.
Say for example, you are a buyer and you know you need tomatoes for summer. If you are somehow anticipating that the price of tomatoes will soar this summer, you enter a contract to buy it a specific price. A price you will be able to handle come summer.
Now, as the seller. You have your broker telling you that most sellers are anticipating the weather disturbance. They may do something else to have enough supply when that time comes. When the supply hits the market and there is a surplus, prices could hit rock bottom. So, to protect yourself from that loss, you could mutually agree with a buyer on the price, amount and date.
After 18 days, both the seller and buyer will fulfill the contract. Loss or profit may go either way. It all depends on what the market dictates.
This explanation may be oversimplified just to let you in on what futures trading is. It would still be best to consult with a licensed broker to get more information.
Article Source: FxTradingStock.com
About the Author
Learn more about futures trading. Stop by the L2ST site where you can find out all about market profile trading and how to enhance your trader performance.
by: Kris Kamwhad
Total views: 11
Word Count: 439
Date: Thu, 16 Jun 2011
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