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17 августа, 2021

Futures Trading – An Introduction

Futures trading online corn contracts Futures trading can trace its history back to farming and agriculture and in particular to the grain and cattle markets of the midwest around Chicago, where even today many of the largest futures exchanges are still based. In the early 1800's, farmers simply grew their crops and raised their cattle, then brought them to market to try to achieve the best prices. Gluts and shortages caused huge swings in prices which in turn affected others in the supply chain who were purchasing these products for onward supply. In addition there was no guarantee that once the products were delivered to the market, that they would actually sell, which in turn led to crops being dumped in the streets and left to rot.

In order to overcome these problems, a centralised market was established which allowed merchants, processors and agricultural companies to trade in various types of 'contracts', to smooth out prices and to insulate them from the risk of adverse price movements in the future. Initially there were two types of forward contracts known as a "to arrive" contract or a "cash forward" contract, but of course many of these contracts were never honoured, as there was no enforcement process in place. Buyers often changed their minds at the last minute, particularly if there had been a decline in prices, and equally sellers reneged if prices had increased. To make matters worse there was no market where these contracts could be traded easily, and so in 1848, the Chicago Board of Trade was established as a central exchange, to provide both a regulated market, and also one where buyers and sellers could be brought together. This was followed shortly afterwards in 1874 by the Chicago Produce Exchange which subsequently became the Chicago Mercantile Exchange in 1898.

The first contract in corn was written on March 13th 1851, and in 1865 standardized futures contracts, based on the original forward contracts, were introduced. The futures market had been established! Today we can trade in a diverse range of markets from currencies and financial instruments such as treasury bonds and securities, to raw commodities and agricultural staples, such as wheat and livestock.

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Now, in our futures trading, do we need grain silos in case we have to take physical delivery of our contracts - the answer of course is no (fortunately), otherwise the banks and brokerages would look more like farming communities than financial institutions, with livestock running wild! (it might make them nicer places, but I digress). However, as we will see in a minute, if you don't close out your positions correctly, you will have to take physical delivery of the underlying contract - so if you don't want 40,000 pounds of live cattle futures in your living room, then I suggest you read carefully!

OK, I hope the above bit of history has given you a little of the flavour, but also helps to explain what a futures contract is, and why so many of the major exchanges that we use today are based in Chicago. Let's start with what a futures contract is and how we use it in our futures trading.

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