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An Introduction to Futures Trading
If someone walked up to you and asked how much you knew about futures trading, would you have an answer or something more like a deer in the headlights look?
If you ever saw the movie "Trading Places," starring Eddie Murphy and Dan Ackroyd, you probably know more about futures trading than you think.
In the movie, the characters were betting on the pricing of a commodity, in this case it was frozen concentrated orange juice. They were betting a bad winter affected orange crops and resulted in low production of oranges, making the commodity of orange juice more valuable because there would be less of it for the public to purchase. You've just witnessed futures trading.
People that participate in futures trading have two distinct trading styles. The first group are the "Hedgers" who have a base interest in the commodity and will invest in collective futures where there is not as much risk, thus "hedging" their investments.
Farming cooperatives are other good examples of using the hedging technique. To insure against a poor harvest, the cooperative will purchase a number of futures in the same commodity, such as wheat. One farm's wheat will not differ greatly from another farm's product and if there is a bad growing season that year due to factors such as weather or insects, the futures investing on a cooperative level can help make up the loss on the markets. This is because all locations would have suffered the same conditions and the supply of that particular crop would have been lowered.
"Speculators" are the dare devils of futures trading. These are people seeking to make a profit through sheer luck and carefully planned predictions on the future of the commodity they are investing in. Speculators are very important in the overall role of futures trading as they take the risk that the Hedgers try to avoid and add liquidity to the trading marketplace by risking their own monies in pursuit of a financial gain.
Now that you know a little more about futures trading, you will never look at your cocoa, cotton, oil, or orange juice the same way again!