What is a Futures Contract?
A futures contract is standardized agreement, made on the trading floor of a futures exchange, to buy or sell a predetermined quantity and quality of a specified commodity or financial instrument at a future date. Futures contracts can be traded only by “open outcry” auction on exchanges registered with the Commodity Futures Trading Commission.
What Is a Commodity?
In the futures trading industry, a commodity is an article of commerce or a product that lends itself to standardization for the purpose of a futures contract. Types of commodities include certain agricultural products (such as wheat, soybeans, cotton, sugar, cocoa, coffee), livestock (cattle, hogs) metals (gold, silver, platinum), petroleum (crude oil), foreign currencies, and financial instruments and stock indexes to name a few.
Where Are The Futures Exchanges?
A futures exchange is association of persons who participate in the business of buying or selling futures contracts or futures options. There are futures exchanges all over the world. Those in the United States include Cantor Exchange (CX) in New York City, Chicago Board of Trade (CBT), Chicago Mercantile Exchange (CME), Kansas City Board of Trade (KCBT), Minneapolis Grain Exchange (MGEX), New York Board of Trade (NYBOT), and New York Mercantile Exchange (NYMEX). There are also futures exchanges in all industrialized nations.
Why Do Northwest Investors Trade Futures?
In the most general terms, those who trade do so for one of two reasons: to transfer financial risk or to accept it with the intention of making a profit. A wide variety of individuals or businesses – from the wheat rancher in Central Washington to the warehouser in Seattle -- can buy or sell futures contracts to offset risks of changing market risk. Speculators buy and sell futures contracts, accepting those risks with the intent of making a profit.
How Is Futures Trading Different From Investing in the Stock Market?
Individuals who purchase stock or mutual funds comprised of stock are purchasing shares of ownership of the company in hope that the company will be profitable, and the value of their ownership will increase over time. A futures contract is an agreement to buy or sell a specific amount of a commodity at a specific date in the future. It is typically a short-term (3- to 6-month) transaction based on the price of the underlying commodity.
What Kinds of Futures Trading Accounts Are Available?
Futures brokerage firms offer four types of futures trading accounts:
- Self-Directed – The brokerage firm processes transaction on behalf of the client, who makes all transaction decisions.
- Discount – The client completes all transactions without service or support. Typically this involves online (Internet) trading software.
- Risk Management- Hedge Accounts – Used by professionals to offset business risk, hedge accounts are often managed by futures professionals and are tailored to each individual client and their situation.
- Managed Accounts – Managed by a professional, diversified across a variety of markets.
- Systems Trading - Systems are used by self-directed traders as well as in managed accounts. The account follows the trading strategy of a particular specialist or industry guru.
How Should A Northwest Investor Select a Broker?
Five key criteria are important in the selection of a brokerage firm: the length of time in the business, the services they offer, their clearing arrangement, commissions and their disciplinary record. Additionally, many traders prefer to work with a local firm for accessibility, education and problem-resolution.
- Length of Time: Nothing can replace experience and longevity in futures trading. Look at the longevity of the office, and the number of years your particular broker has been trading futures.
- Services Offered: Evaluate the types of services offered such as discount brokerage, managed accounts, self-directed accounts, as well as supporting services such as paper trading, educational resources.
- Clearing Arrangement: There are three types of clearing arrangements. The one that provides investors the most financial strength is a guaranteed introducing broker.
- Fees: Fee levels vary depending on the degree of service the client requires. Typical fee for full-service is $65 to $100 “round turn” per transaction.
- Disciplinary Record: Check with the National Futures Association (www.nfa.org) when evaluating a brokerage firm.
Select only those firms that are registered with the National Futures Association (NFA). In selecting a manager for a managed account, look for advisors who have the Commodity Trading Advisor distinction or CTA. This is a designation given by the NFA to individuals who manage other people’s money and publish their trading track record.
Futures Trading is Not For Everyone. Who Should Not Trade Futures?
Futures trading falls into the category of high-risk/high-leverage investing. This means the potential for gain is very high, but so is the potential for loss. Financially, an investor must have at least $5,000 of risk capital – in other words, money they can afford to lose – to even consider futures trading. Emotionally, the successful futures trader is one who does not let the volatility of the markets affect his or her sleep or well-being.
What Type of Investor is Successful At Trading Futures?
In short, the successful trader does not trade futures on emotion. The successful trader does not expect continuous steady growth; they expect volatility, they are independent thinkers, and risk takers. Those who lose money from trading futures are those who trade beyond their means and trade too often.
What Should An Investor Do To Educate Him or Herself Before Beginning Futures Trading?
Every individual interested in trading futures should take an introductory course that will acquaint them with terminology and trading strategies. Columbia Futures Group recommends the online courses offered by the Chicago Mercantile Exchange. Introductory courses are available for $99 to $120.
Why Has There Been an Increased Interest in Futures Trading Recently?
According to the Futures Industry Association, US futures trading volume in 2002 increased 25%, and international volume increased 36% over the previous year. This is a continuation of the growth recorded in 2001 which saw a volume increase of 15.3% over the previous year. The FIA attributes this growth to turmoil in the equity markets, an uncertain economic outlook, and a flight to safety in the energy sector.
Is Futures Trading a Form of Gambling?
Futures trading is not just a roll of the dice. The people who do it well do their homework, they understand the markets, and if they are individual investors they work with experienced professionals.
Who Oversees the Futures Trading Industry?
The Commodity Futures Trading Commission is the federal regulatory agency that oversees the industry. Independent professional associations such as the National Futures Association are organizations of futures professionals who seek to maintain the integrity of their profession and protect investors from unethical practices.
Take the next step
At Columbia Futures believe in the principles of integrity, excellence and patience with all our clients. We work with investors and their advisors to diversify their investment strategies and manage risk. Take the next step by:
Opening an Account or calling: (800) 753-0204 to find out how we can help you manage and grow your assets.