Fans of fantasy fiction might be familiar with Terry Pratchett’s Discword series of novels, which have sold an amazing 80 million copies across the globe. The novels gently mock certain aspects of modern life while telling the stories of wizards and witches, in a comedic world where magic exists.
Savvy investors in the fictional Discworld will often make use of the Pork Futures Warehouse, wherein pork that does not exist yet is purchased and sold on, as soon as it materializes through traveling back in time. If only the futures market in the real world was so much fun, but instead it can be a landmine of indecision and can often feel like a gamble.
It doesn’t have to be this way, and while the ins and outs of the futures market can seem daunting to the novice investor, with a bit of research and diligence, it can prove to be an effective form of both long and short-term investment. If you are considering entering the world of futures, then there are a few key things you need to know.
The History of Futures
Futures were introduced by the Chicago Board of Trade in 1865. The Board was largely concerned with the value of agricultural crops, and this was largely grain based. Farm owners could bring a sample of their crop to be inspected, and a value would be placed on the expected subsequent value of the harvested crop. This method for determining future value was soon seen to be insufficient, and an inspection of the crop at the site of origin was soon mandatory. The early method of futures trading was an insurance for the farmer, allowing them a guaranteed purchase at an advantageous price, despite the ups and downs of the market.
While futures trading still exists for tangible assets such as agricultural products, it’s now also available for the less certain world of stocks. This is perhaps not an advisable option for those who are new to investing, and yet it can still be a lucrative choice for those who do it correctly- although with the often volatile nature of both traditional and futures markets, “correctly” is often difficult to achieve. Futures markets are vital to the modern global economy, as activity at this level ends up affecting and even setting the price for many different commodities.
Futures and Speculation
Unlike mutual funds or even the individual purchase of stocks, futures trading isn’t for the passive investor, and you need to be standing to attention all the time; meaning you’ll need to be constantly checking prices online, although this is easier in today’s smartphone and tablet world. While it operates in a manner similar to traditional investment, putting your money into futures is a financial speculation- you’re making a decision now and are hoping that the vagaries of the market will work in your favor.
Are Futures for You?
It’s easiest to see futures as entering a binding agreement to purchase (or sell, as the case might be) a certain number of stocks on a predetermined date (which can be varied in your favor) for a predetermined amount of money. You never actually own the stock; although you can buy or sell the futures contracts early if the price moves in your favor. The futures market can be so wonderfully lucrative because you generally only pay for a margin of the overall price, and not the total value of the stocks themselves. These margins can vary, but are usually only 20% of the total value- allowing you to potentially make a significant profit from a relatively small investment.