What is a commodities futures contract?

What is a commodities futures contract?

Commodities Futures are one of the most highly traded securities in the world, and it is partially because nothing has to be delivered by the participants as in a spot-trading market.

Futures can be purchased on margin, opening up large positions, long or short, and if a trader finds a place to exit before the settlement date of the contract, the trader will buy/sell to close his or her position, and the exchange will regard the trader’s position as flat, and nonexistent for all intents and purposes.

Futures contracts were once used by farmers to lock in prices at which they could buy or sell goods in a few months. Now, commodities futures and their derivatives are almost entirely detached from the actual goods which once underlaid them.

There are multiple trillions of dollars worth of trades that take place over the commodities futures exchanges each year, with a fraction of that actually being exchanged in physical commodities. Advisors and traders with a Series 3 FINRA certification can serve as brokers for commodities futures.

Investors will need to be experienced enough to be approved for the use of margin in their account, for the most part, since that is part of what gives this market its sizzle. Using leverage that tends to be much more accommodating than for stock market margin, traders can take larger positions than they might really intend to pay for, and can close out their positions before any goods are due for delivery.

Commodities futures are in a highly speculative market where much can be gained but much can also be lost. They only trade on highly regulated and standardized markets which provide liquidity and offer some protection.

Futures can have a physical settlement or a financial settlement. If it is a physical settlement future, there will be an assignment date and a delivery date that traders will need to avoid if they do not intend to settle in physical goods.

Futures are regulated by the Commodity Futures Trading Commission (CFTC) instead of the SEC, since futures are not technically considered securities. The CMTC sets limits on the allowable speculative position in any one commodity.

What is the Commodities Futures Trading Commission?
What is a Commodity Trading Advisor (CTA)?