If you’re a stock trade dummy like me, you’ll be amazed at how this seemingly intimidating futures trading started out as a simple buyer-seller exchange in the old times. When railroads were developed and industrial machines were invented to create mass production of good, sellers of wheat, for example, would travel to the city’s center with hopes of finding someone to buy his wheat. But lack of places to store the goods in the area was a problem which left farmers with not much choice but bring unsold items back to the farm. If supplier immediately found a buyer on spot, then that’s luck smiling down on him.
To minimize risks on the seller’s part, a process was created where buyers and sellers can meet and trade on spot — buyer will pay the seller for the goods he needs and seller will make sure that goods are delivered to the buyer on the agreed time. A futures contract was drafted on mutual trust and goodwill and money was exchanged for the future delivery of goods.
This dealer-supplier contract can also be transfered from one hand to another by selling it at higher or lower price depending on prevailing conditions. If the dealer did not want the wheat, he can sell it to another dealer. The same thing also applies to the farmer. Other external conditions also affect this type of futures trading. If the weather was bad, supply was tight and those dealers were holding more valuable contracts. If supply was bigger, contracts held by dealers were far less valuable.
The same concept applies on today’s modern trading. Stock markets have become volatile as there are more industry players today and several factors that can affect trade also vary. This is where a futures broker comes in to assist you in important investment decisions and present you with other options.
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