Future Investment

Future Investment

The popular perception of futures is that they are a form of very high risk speculation. This is true. But futures are also widely used as financial tools for reducing risk. Futures speculators invest in commodity futures in the same way others invest in stocks and bonds, and mutual fund managers also use futures to hedge against risk. The primary purpose of futures markets is to provide an efficient and effective mechanism for the management of price risks. Futures traders accept price risks from producers and users with the idea of making substantial profits.

A futures contract on a commodity is a commitment to deliver or receive a specific quantity and quality of a commodity during a designated month at a price determined by the futures market. For example, someone buying an April Canola contract at $5 a pound is obligated to accept delivery of 100 pounds of canola during the month of April at $5 per pound. Selling a futures contract means you are obligated to deliver these goods. The same concept applies to buying a futures contract on any other asset. It is important to know that a very high portion of futures contracts trades never lead to delivery of the underlying asset; most contracts are "closed out" before the delivery date