There are two groups of participants in the futures markets.
The first group of participants comprises buyers and sellers of goods, known as commercial participants, or hedgers. This group includes farmers and other producers of goods who wish to sell their products at a specified price as well as buyers of commodities who wish to hedge against price increases.Commercial participants are not in the futures markets to make a profit, but rather to protect themselves against price changes. For example, if the price of corn drops before the time the farmer sells his futures contract, he is still guaranteed the price at which he sold the contract.
The second group of participants in the futures market is investors (also known as speculators). Investors serve an important function in the futures market because there is often an imbalance between those wanting to sell contracts and those wanting to buy. Investors provide much needed liquidity to the futures markets and are compensated for taking on this role.
One of the distinguishing factors regarding the futures markets is that they exist primarily to protect against price uncertainty for buyers and sellers of goods. As a result, most of the participants are not in the market to make a profit, but
rather to hedge against price risk. This can sometimes create opportunities for investors (or speculators) to make a profit.
Commodities different and Paper Assets!!
Commodities differ from paper assets (equity and fixed income) in that they require storage costs. While paper assets can be held in brokerage accounts at little or no cost, commodities such as crude oil, wheat, or livestock obviously cannot be stored in a vault or electronically in a database and storage costs for commodities can sometimes be significant. Storage costs must be a consideration for an investor, as they will impact the pricing structure of futures contracts of individual commodities. For this reason, the change in the price of futures contract for a commodity may vary from the change in the price of the underlying commodity because futures contracts take into account these storage costs. As a result of storage costs, longer dated futures contracts (for example, delivery in six months), will generally be priced higher than shorter dated futures contracts for delivery in one month.
The first group of participants comprises buyers and sellers of goods, known as commercial participants, or hedgers. This group includes farmers and other producers of goods who wish to sell their products at a specified price as well as buyers of commodities who wish to hedge against price increases.Commercial participants are not in the futures markets to make a profit, but rather to protect themselves against price changes. For example, if the price of corn drops before the time the farmer sells his futures contract, he is still guaranteed the price at which he sold the contract.
The second group of participants in the futures market is investors (also known as speculators). Investors serve an important function in the futures market because there is often an imbalance between those wanting to sell contracts and those wanting to buy. Investors provide much needed liquidity to the futures markets and are compensated for taking on this role.
One of the distinguishing factors regarding the futures markets is that they exist primarily to protect against price uncertainty for buyers and sellers of goods. As a result, most of the participants are not in the market to make a profit, but
rather to hedge against price risk. This can sometimes create opportunities for investors (or speculators) to make a profit.
Commodities different and Paper Assets!!
Commodities differ from paper assets (equity and fixed income) in that they require storage costs. While paper assets can be held in brokerage accounts at little or no cost, commodities such as crude oil, wheat, or livestock obviously cannot be stored in a vault or electronically in a database and storage costs for commodities can sometimes be significant. Storage costs must be a consideration for an investor, as they will impact the pricing structure of futures contracts of individual commodities. For this reason, the change in the price of futures contract for a commodity may vary from the change in the price of the underlying commodity because futures contracts take into account these storage costs. As a result of storage costs, longer dated futures contracts (for example, delivery in six months), will generally be priced higher than shorter dated futures contracts for delivery in one month.
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