June 3, 2009
Futures commodity trading and what it entails
Many people see pictures of the large crowd of traders standing in a crowd yelling and signaling with their hands, holding pieces of paper, and writing frantically. To the outsider, it looks like chaos. But do you really think that there’s chaos going on in the world’s futures pits?
In this article, you’ll learn a bit about the trading of futures, so that you will know exactly what’s going on when you see it depicted somewhere.
Today’s futures trading floor is much different than it was when it first began quite a long time ago. Back before there was an actual futures market, those who grew fruit, grain and vegetables would cart their crops to a major town or city and try to sell them.
Also, because many farmers would bring their crops to market at the same time, the price of the crops or commodities would be driven down. There was tremendous supply in relation to demand. The reverse was true in the spring. Many times there would be a shortage of crops and commodities and the price would rise sharply. There was no organized or central marketplace where competitive bidding could take place.
Initially, the first organized and central marketplaces were created to provide spot prices for immediate delivery. Shortly thereafter, forward contracts were also established. These ‘forwards’ were forerunners to the present day futures contract.
Futures prices and the bid and asked price are continuously transmitted throughout the world electronically. Regardless of what geographic location the speculator or hedger is located in, he has the same access to price information as everyone else.
Regardless of the speculator’s location, the playing field is leveled because everyone has access to the exact same information. It could be one of your competitors who takes your trade, or another speculator.
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