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The Futures market is much like the options market, except you are obligated to buy or sell at a specified date in the future. The other main difference is that only commodities are traded. In the futures market, there are no companies to assess or research, it is simply based on the amount of demand there is for your chosen commodity.

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The people who trade on the futures market with the aim of making a profit are called speculators. Here is an example of a possible futures contract a speculator would enter: A speculator may think the price of gold is about to rise. He could pay a deposit of $2000 and undertake to buy gold at US$550 per ounce for delivery in a particular month. He would do this in the hope that he would be able to sell the gold at a higher price in the future. If his speculations are correct, he would then enter a contract to sell gold at the current price (say it had risen to US$600). He would then have made a profit of US$50 per ounce. Each gold contract is 100 ounces, so he would have made US$5000. On the other hand though, if the gold price had actually fallen US$50 instead of rising, the speculator could have lost US$5000.

After being given this example, you have probably already figured out that the futures market is a very high risk investment choice. In fact, between 80% and 90% of people entering the futures market lose small amounts to large amounts of money.

Because of its high risk, it is more suited towards professional speculators. It is definitely not the most popular investment choice.

You might ask: What is the point of having these future exchanges?

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Manufacturers around the world need the security of being able to buy supplies and sell their products at todays prices and interest rates. It also gives them a guide as to how much they should charge for their products in order to make a profit.

Ron Bennetts / The Stockmarket / pg 116-119