What is a Futures Contract?

A futures contract is a standardized agreement to buy or sell a predetermined quantity and quality of a specified commodity or financial instrument at a future date. Futures contracts can be traded either online or by “open outcry” auction on exchanges registered with the Commodity Futures Trading Commission.

What Is a Commodity?

In the futures trading industry, a commodity is an article of commerce or a product that lends itself to standardization for the purpose of a futures contract. Types of commodities include certain agricultural products (such as wheat, soybeans, cotton, sugar, cocoa, coffee), livestock (cattle, hogs) metals (gold, silver, platinum), petroleum (crude oil), foreign currencies, and financial instruments and stock indexes to name a few.

Where Are The Futures Exchanges?

A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products. A commodities exchange also refers to the physical center where trading may take place.

Why Do Northwest Investors Trade Futures?

In the most general terms, those who trade do so for one of two reasons: to transfer financial risk or to accept it with the intention of making a profit. A wide variety of individuals or businesses – from the wheat rancher in Central Washington to the warehouser in Seattle -- can buy or sell futures contracts to offset risks of changing market risk. Speculators buy and sell futures contracts, accepting those risks with the intent of making a profit.

How Is Futures Trading Different From Investing in the Stock Market?

Individuals who purchase stock or mutual funds comprised of stock are purchasing shares of ownership of the company in hope that the company will be profitable, and the value of their ownership will increase over time. A futures contract is an agreement to buy or sell a specific amount of a commodity at a specific date in the future. It is typically a short-term (3- to 6-month) transaction based on the price of the underlying commodity.

What Kinds of Futures Trading Accounts Are Available?

Futures brokerage firms offer several types of futures trading accounts:
Self-Directed – The brokerage firm processes transaction on behalf of the client, who makes all transaction decisions.
Discount – The client completes all transactions without service or support. Typically this involves online (Internet) trading software.
Risk Management- Hedge Accounts – Used by professionals to offset business risk, hedge accounts are often managed by futures professionals and are tailored to each individual client and their situation.
Managed Accounts – Managed by a professional, diversified across a variety of markets.
Systems Trading - Systems are used by self-directed traders as well as in managed accounts. The account follows the trading strategy of a particular specialist or industry guru.

How Should A Northwest Investor Select a Broker?

Four key criteria are important in the selection of a brokerage firm: the length of time in the business, the services they offer, commissions and their disciplinary record. Additionally, many traders prefer to work with a local firm for accessibility, education and problem-resolution. Length of Time: Nothing can replace experience and longevity in futures trading. Look at the longevity of the office, and the number of years your particular broker has been trading futures. Services Offered: Evaluate the types of services offered such as discount brokerage, managed accounts, self-directed accounts, as well as supporting services such as paper trading, educational resources. Brokerage commissions, clearing and exchange fees will depend upon account type, the exchange traded, and client experience; but “round-turn” commissions and fees should be discussed with your broker. Disciplinary Record: Check with the National Futures Association when evaluating a brokerage firm. Select only those firms that are registered with the National Futures Association (NFA). In selecting a manager for a managed account, look for advisors who have the Commodity Trading Advisor registration or CTA. CTA’s have limited power of attorney to solely make trading decisions for their clients’ accounts, and routinely publish their trading track record.

Is Futures Trading a Form of Gambling?

In our opinion futures trading is not just a roll of the dice. Although the risk of loss exists when trading futures and options on futures, we believe the people who do it well do their homework. They understand the markets. Further, we recommend individual investors work closely with experienced professionals.

Who Oversees the Futures Trading Industry?

The Commodity Futures Trading Commission is the federal regulatory agency that oversees the industry. National Futures Association is the industrywide self-regulatory organization responsible for maintaining the integrity of the industry and protecting investors from unethical practices.

What Should An Investor Do To Educate Him or Herself Before Beginning Futures Trading?

Every individual interested in trading futures should take an introductory course that will acquaint them with terminology and trading strategies. Columbia Futures Group recommends the online courses offered by the Chicago Mercantile Exchange. Introductory courses are available for $99 to $120.

Seattle-based commodity futures trading firm working with investors and their advisors interested in diversifying your existing portfolio

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