Frequently Asked Questions

Q: What are futures?

A: Futures came into being as a method of providing insurance for farmers and manufacturers who wanted to fix a price for their produce at a future date. This enabled both farmers and manufacturers to plan long-term, secure in the knowledge that their produce would be worth a certain amount in the future.

Today, the Futures industry has expanded to include financial markets, and provides risk management tools related to currencies, interest rates, and stock and commodity indexes.

Trading in futures essentially deals with the creation of legally binding agreements regarding how much the traders involved will buy or sell a commodity for at a specific date in the future (the "settlement date", usually within a few months). Although actual delivery of the commodity can take place in fulfillment of the contract, most futures contracts are closed out or "offset" prior to delivery.

It is important to note that Futures trading is not suitable for all individuals. While the amount of leverage available allows for large profits, the potential for losses is equally great. Past performance is not indicative of futures results. It is imperative that you recognize the risks involved before becoming actively involved in the Futures market.

Q: How to trade futures?

A: Futures contracts are traded by means of an auction-like process, where all bids and offers on each contract are made public. This method ensures that the prevailing market price is reached for each contract, based as accurately as possible on the principles of supply and demand. The exchange of contracts is executed subject to the rules of a commodity exchange. An individual cannot trade directly on an exchange; he would need to go through a firm registered with the Commodity Futures Trading Commission.

There are two main categories through which trading can take place. The first is an Individual Account, where trading is done only for the particular client. This may be "non-discretionary" (where the broker may not execute any transactions without the client's prior approval) or "discretionary" (where the broker has permission to make trading decisions on the client's behalf). An Individual account may be opened with a registered Futures Commission Merchant or through an Introducing Broker, who may accept the client's orders and transmit them to a Futures Commission Merchant for execution. Introducing brokers may not, however, accept any funds from the client; funds are deposited directly with the Futures Commission Merchant.

The second category is a Commodity Pool. Here, the client purchases interests in the pool and trades are executed for the pool rather than for the individuals who have interests in the pool. Pool participants share ratably in profits or losses generated.

Q: Why futures now?

A: Money continually looks for a higher return, which is tempered by risk. Since we are in a major bear market, recession if not depression, stock trading is out of favor. Too many people who made easy money in the bull market were severely burned during the recent collapse. While stocks may be cheap, one can assume that terrorism will continue to jolt the market with a series of shocks. Smart money is now moving in to MANAGED futures accounts, because of their increased volatility. Given the new world conflicts erupting, one can assume that volatility is here to stay for some time. Futures traders thrive on volatility, given the tremendous leverage available in the futures markets. To illustrate, one is required to deposit only 5% of the value of a transaction. If the value of the commodity fluctuates by 1% the investor stands to make or lose 20% (1/5 x 100).

It is important to recognize that one can "short" futures just as easily as one can "go long" the market. The principle is quite simple: the basic rule for making money is for the selling price to be higher than the purchase price. Through the use of futures, one can sell a commodity before one has bought it in the expectation that the price will be dropping in the future and one's buying price will therefore be lower than the original selling price.

Although most people feel uncomfortable "shorting" a commodity, the risks involved are exactly the same as "going long". Since volatility moves in both directions, the advantages of being able to short the market are obvious.

Q: What are the advantages of futures over forwards?

A: 1. Immediate gratification - profit or loss are settled daily.
2. Registered, audited exchange, whereas forwards is transacted principle to principle.
3. The floor broker on the exchange has no idea whether you are opening or closing a position. Not so in Forex where the dealer takes the other side of the transaction.

Futures trading is considered high risk and most definitely not for amateurs. One should not invest more than 10% of one's investment portfolio in such investments.

Q: What are the advantages of trading futures over Day Trading stocks?

A: