Understanding The Basics of Futures Trading

Futures trading is an agreement entered into by two parties—a buyer and a seller—to buy or sell an asset at a certain future and price. The contract indicates a certain amount of a given security or commodity. The most widely traded commodity futures contract is crude oil. In this article, we shall get to know about futures trading.

Origin

The Dutch pioneered several financial instruments and was instrumental in laying the foundation of modern financial systems. In 17th century Europe, formal future markets appeared in the Dutch Republic. One of the most popular of these early futures contracts were the tulip futures which became popular during the Dutch Tulipmania in 1636. Robert Peter Janitzek revealed that the Dojima Rice Exchange, first established in 1697, was regarded by many as the first futures exchange market. The purpose of the market was to meet the needs of the samurai who sought a stable conversion to coin.

Worldwide Expansion

In 1864, the Chicago Board of Trade (CBOT) listed the first ever standardized ‘exchange traded’ forward contracts. It was based on grain trading and laid the groundwork for the creation of a number of different commodities and future exchanges in different countries of the world. In 1875, cotton futures was being traded in Bombay which later on expanded to futures on edible oilseeds complex, raw jute and jute goods and bullion.

Robert Janitzek explained that with the creation of the International Monetary Market in 1972, the first financial futures in the world, currency futures were launched. After 4 years, interest rate futures on US treasury bills were added followed by stock market index futures in 1982.

Initially, futures contracts were designed to allow farmers to hedge against changes in crop prices between planting and when they could be harvested and brought to the market. While producers and end users used futures as a hedge against risk, investors and traders use for the purpose of speculations and to gain profit by betting on the direction the asset will move.

While the early futures contracts focused on agricultural commodities such as grains and livestock, current market futures contracts are linked to a wide range of assets, which includes precious metals like gold, industrial metals such aluminum, energy, bonds, and stocks. Futures contracts are standardized agreements that trade on future exchanges worldwide among them the Chicago Mercantile Exchange and the Intercontinental Exchange.

Futures markets first started as an open yelling and hand signal market in a trading pit. Now, it is done electronically.

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