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» Futures Contracts- Defined
Futures contracts are standardized instruments (units) which represent a certain amount of a commodity of specified quality, quantity and delivery time. The only variable is price, which is discovered on a trading exchange floor. For instance, one gold futures contract represents 100 troy ounces of gold, while one crude oil futures is equivalent to 1000 barrels of crude.
Futures contacts are available on many commodities, currencies and stock indexes that are traded on regulated exchanges.
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» Uses of futures contracts
Futures contracts are widely used as highly leveraged investment instruments by individuals and institutions. Let us assume that an investor thinks the gold price can stage a rally soon, and he wants to take advantage of such an anticipated price movement. He can then buy gold futures contracts instead of buying and storing physical gold. The attractive point here is that only a small amount of capital is required to buy a large amount of gold in terms of futures contracts.
When you buy gold futures contracts for investment purposes, you will not have to take delivery of gold in normal cases. Instead you are entering into an account transaction of buying a standard amount of gold. In this way you are omitted from the unnecessary burden of buying and storing physical gold. Now suppose the price of gold did in fact rise in a month's time and the total value of the gold futures will also increase considerably. The futures contracts can then be sold to make a profit in the investment account.
It is worth mentioning that you can also make money in a falling market. In this case, investors sell futures contracts anticipating the prices to fall and buy back the futures after the prices have fallen. This will again generate a profit in their investment account.
Buying and selling of futures contracts take place instantly by placing orders through a brokerage firm on to futures exchanges. Many investors trade futures on a daily basis to profit from daily price changes.
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» Commodities available for futures trading
Commodity futures contracts are traded in gold, silver, crude oil, sugar, cocoa, wheat etc., while stock index futures include S&P 500, NASDAQ 100, Dow Jones 30 etc. Currency futures contracts represent Euro, Japanese Yen, British Pound, Swiss Frank and many more.
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» Location of the major futures markets?
Futures markets are truly global in nature reflecting the supply and demand forces of commodities worldwide. Major futures exchanges are located in New York, Chicago, London, Tokyo and Frankfurt.
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» What is the minimum investment required to get started in trading?
You may be able to open a trading account for as little as $10,000. However, many professionals suggest that an investment of $25,000 or more. The more you invest, the more contracts you will be able to trade, as each contract requires a margin deposit.
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» How safe is my money? Are futures markets financially sound?
Because the clearinghouse of various commodity exchanges guarantee every transaction on their exchange, your money is absolutely safe. The clearinghouse acts as a guarantor of every futures contract by acting as a buyer to every seller and seller to every buyer. The obligations are backed by guaranteed funds deposited by the Clearing firms. Most clearings firms are well-established investment banks and financial institutions.
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» What is a good way to start?
A good way to start would be to visit us at our offices where professionals will design various strategies for individual investors depending on their risk profile.
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The Bullion Market
The center of world gold trading is London, and the center of London gold and silver trading is the London Bullion Market, operated by the London Bullion Market Association (LBMA). Members are classified into market making members, which include all of the participants in the twice-daily London gold fix. Ordinary members, of which there are about 50. Most bullion houses act both as brokers for customers, and as primary dealers who hold positions of their own in order to profit from the bid/asked spread or from equilibrium price movements.
Market makers are obligated to make two-way prices (that is, for both buying and selling) throughout the day. Ordinary dealers will usually quote prices to their own clients, but have no obligation to make two-way markets or to quote to other dealers.
The fixing of the gold price starts at 10:30 a.m. in the morning (and lasts until a single price representing temporary equilibrium between supply and demand is found, usually a few minutes later), and again at 3:00 p.m. in the afternoon. (A silver price fixing takes place beginning at 12 noon.) During these time periods the fix is the principal focus of trading, but trading by the same firms occurs before and after the fix, and indeed gold trades around the world for almost 24 hours a day.
Most gold trading around the world takes place "loco London", meaning the gold is sold for delivery in London.
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» The FOREX Market
It is impossible to envision a world without foreign exchange. Even the smallest transaction across borders triggers a currency exchange at one point or another. Whether importing or exporting raw materials, labor, manufactured goods or services, foreign exchange is an integral part of the transaction. Tourists around the world generate substantial exchange flow. When tourists go abroad they all must convert their currencies to local currencies to pay their traveling expenses. These small individual transactions generate important cash flow when compounded.
Few financial instruments generate as much excitement and profits as Foreign Exchange Trading. Traders from around the world take foreign exchange positions for weeks, days hours or only split of seconds, The market can have explosive moves or steady flows giving opportunity to invest in rising as well as in falling markets. The Foreign Exchange market has been gaining momentum at an astounding pace. Today, it’s volumes exceeds a staggering One Trillion U.S. dollar per day.
The demand and supply of currencies in the foreign exchange market determine the movement of exchange rates. This movement involves the appreciation or depreciation of one currency vis-à-vis the other. Demand and supply, in turn, is based on the requirements of the Governments, Businesses and Individuals in the various countries as well a speculators.
Unlike the stock market, the foreign exchange market is not a centralized market in the physical sense, instead, it is a borderless global market whose participants are linked together by sophisticated means of telecommunication.
Investors around the world, whether large or small, are continuously hunting for investment opportunities. Whether in the Equity Markets, Real Estate or Bank Deposits, all international investments must at one point or the other go through Foreign Exchange markets.
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