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So, What Exactly are Futures?
Futures can seem confusing. There a number of types of futures and the way they are traded, at first glance, can also seem confusing.
In the most basic of terms, futures are an agreement to deliver a commodity at a particular price. They involve betting that there will be enough of a particular commodity that it will be sold at that price.
A commodity is a tradeable asset that can range from orange juice, cocoa, sugar, wheat, corn, barley and other grown products as well as wood, electricity and cotton. Commodities have also come to include bonds, money markets, and the foreign exchange.
Comedians joke about "pork belly futures" but in reality, there is an actual market of people that bet that in the future there will be a continued demand for pork bellies and they continue to invest in this commodity.
The futures market is overseen by the Commodity Futures Trading Commission (CFTC), which is a department in the Federal Government. The CFTC regulates traders and commodities traded to ensure that consumers and traders are protected from fraud and false market manipulations.
Originally, the only commodities traded were "soft" commodities such as corn, oats, rice, soybeans, wheat, and other basic necessities and food items.
Later these commodity markets expanded to include the following markets:
International Petroleum Exchange, which trades all makes and manners of petroleum-based energy such as crude oil, heating oil, unleaded gas and natural gas.
New York Board of Trade, where soft commodities such as the three "C's" cocoa, coffee and cotton are traded; as well as orange juice and sugar.
New York Mercantile Exchange, where energy and metals are traded. Futures traders can find crude oil, gasoline, heating oils, natural gas, coal, propane gas and metals such as gold, silver, platinum, copper, and aluminum in which both hedgers and speculators invest.