Why use Futures?

The world’s futures exchanges are flooded with speculators, hedgers and information seekers. Futures speculators play a riskier game in its exchanges than in the stock market. It is a lot harder to bet on the direction of corn cobs than it is to estimate a company’s performance. Alternatively if you use the exchange to secure economic information, the guessing job can be a lot easier.

Most hedgers however, deal with futures not to gain an edge in guessing games, but rather to secure assets for personal gain. To not make a future loss when supplies drop or become more expensive, a garments company could prepay today’s prices to have a four month supply of material. Similarly, a transport facility would want to purchase a future for the delivery of fuel to avoid having to pay more for fuel in case prices spike.

Hedgers are the minority in the futures market, for according to the Chicago Mercantile Exchange, only 3% of the futures contracts bought lead to actual delivery of goods.

Finally, taking a closer look at futures gives one an inkling of price direction and this can help make smarter choices when trading stocks. Standard & Poor’s index of 500 for instance, trades before 9.30am Eastern time and gives a good idea of the ebb and flow of the American stock market.