The Role of Futures Trading Markets
Commodities future trading markets evolved out of necessity. Credit risk was a major factor in their evolution. Looking back, some commodity prices rose with popularity When ships set sail across the ocean, people would put up money in the hope that the ships would return with full holds and make them rich as purchased goods were sold upon their return home and they collected a percentage above their investment. This was a risk to investors as some ships came back empty due to storms and some ships did not return at all. In these kinds of primitive forerunners to the futures commodity markets, the risk was evident. As the New World began to produce buckets of grains and other riches, the problem of seasonality reared its head.
In the Midwest, the breadbasket of the Americas, large volumes of grain and other produce would be delivered at harvest time and the price would be decreased as supply increased. When things spoiled and shipments stopped coming as harvest time passed, the price would invariably go up. In a concerted effort to eliminate this supply and demand disparity, merchants began to invest in storage facilities near the Great Lakes where contracts on receivable products could be arranged for the future. These forward contracts on a futures commodity would possibly help to limit price risk for both the merchant who bought the goods and the farmer who delivered them.
Over time, this evolved into the standardized futures commodity contracts and grain futures we recognize today. Exchanges designated by the CFTC now trade futures commodity contracts across a wide variety of markets. While a small percentage of participants in commodities future trading are people who have an end interest in the actual commodity, many of the participants are speculators. These people trade a futures commodity hoping that future prices will change and result in a profit. As a kind of trade-off for this opportunity, speculators provide liquidity, an ease of selling and buying contracts This liquidity or ease of sale and purchase allows for greater numbers. What price do participants consider fair market discovery for a futures commodity price? The more buyers and sellers willing to participate in a particular market, the higher the possibility that it may have a fair price will result.
Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
