![]() Spreads – Benefiting from the price difference between two varying contracts of a single commodity. Going Short – Making a profit from falling price levelsīoth going long and short involves the purchase or sale of the contract to benefit from rising or falling prices n the future. Going Long – Benefiting from the possibility of a future price increase There are three strategies available for the trader in the stock market futures: When the contract’s expiry nears, more solid information reaches the market with regard to the commodity in question.Ī futures contract aims to predict the future value of an index/commodity. Information is continuously being fed, and speculators, as well as hedgers, benefit from each other. Secure a price now, believing prices will rise Secure a price now, thinking prices will fall Guard against future rising prices by securing a price Guard against declining prices in the future by securing a price Speculators do not seek to own the commodity, while hedgers do. In the future, speculators purchase a contract low to sell high ahead, while hedgers sell low, thinking the price will fall. Hedgers want to minimize risk speculators want to maximize it. These are speculators, and they benefit from the price change the hedgers want to avoid. Other participants in the market benefit from the risky nature of the futures market. Hedging through the stock market futures means the contract can help secure the wanted price margin between the raw material’s cost and the retail cost of its final product. While long position holders are the buyers of the commodity futures, short holders of the contract will be the sellers.Ī futures contract provides for definite pricing, thereby reducing risks linked with price volatility. Short holders will aim for the highest price possible. Holders of the long position will try to get the lowest price possible. Hedger buys or sells in the futures market to secure the future price of the commodity sold at a later point in the cash market. Two players in the futures market = Hedgers and Speculators This is because less risk = less chance of manufacturers increasing prices to make up for profit/loss in the cash market. Risk Reduction: Risk is reduced in the futures market as the price is pre-set, letting buyers and sellers know and reducing the cost for the retail buyer. Price Discovery- This refers to how the type of information and manner in which people absorb it constantly changes the prices of the commodity. The futures market is based on information from different corners of the world and is really transparent.
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