The fact that you are reading this article means that you probably know a little bit about
futures trading, but in case you don’t, this sort of transaction occurs when two parties agree to a certain business deal that won’t happen until later down the road. This involves some sort of good that the parties set a price on now to lower the risks involved in purchasing or selling it later. The futures contract establishes when the product will be sold, what condition it will be in, and what price it will be sold for at the time.
Now most people can grasp the idea of futures trading pretty well, but there is a lot of confusion about what really occurs after the settlement. It should first be noted that more often than not, the two people involved in the trade never actually trade the physical commodities. They merely embark in the futures contract to eventually receive a cash settlement. Rather than working with one another when the contract is up, they both take out cash settlements that they use to buy or sell a crop outside of the market.
But how do cash settlements work then? Well, let’s assume that on the day that the futures trading occurs that both parties agree on a price of $5 per bushel of wheat in the trade, for a total of 500 bushels. If on the next day, the price jumps to $6 a bushel in the market, then the buyer will receive a cash settlement to accommodate for the profits he has made. He purchased the wheat for $2500 total, and now it is worth $3000, so that day he has made an extra $500 and the farmer has lost $500.
When it comes down to it though, the buyer really hasn’t made any money per say. It’s just less money that he has to spend. When he gets his settlement, he’ll still have to buy wheat at the current $6 a bushel, which means that he’ll still end up paying $3000 for what he needs. The catch is that $500 of that money doesn’t have to come out of his pocket, making this result from
futures trading more like a coupon than a profit. If, of course, the person doesn’t actually need the product and merely entered the futures contract as a way to earn money, then that’s $500 that he gets to keep that day. The market continues to fluctuate and so do the accounts of both parties until they either work out new futures contracts or the current one comes up.
For more information, Visit
Day Trading Futures,
Online Future Trading,
Trading Psychology
