The term “future trading” covers both speculative transactions, in which futures are bought and sold for the purpose of making. profits from price changes, and hedging transactions, entered into to avoid the inconvenience and loss resulting from price changes.
Essentials of a Satisfactory Futures Market
The essentials of a satisfactory futures market are the following:
1. A continuously liquid market, one where contracts may be executed at any time.
2. A broad market, one that will permit the purchase and sale of a comparatively large volume of goods with a minimum of fluctuation in price, and
3. A market on which all interests in the trade are properly represented, so that prices are made to move as nearly in accord with supply and demand conditions, as possible.
Economic Services Provided by Futures Market
A futures market provides the following economic services commodity marketing:
(1) It is a powerful instrument for the determination of prices of the commodities in which it deals.
(2) It provides base prices that become through the dissemination of price quotations, the basis for the price structure in areas tributary to the market.
(3) It provides a continuous open market in which purchases and sales can readily be made in large quantity with minimum changes in prices.
(4) It provides a machinery for arbitraging transactions by means of which prices in different markets are kept in time.
(5) It makes possible the hedging of price risks.
(6) It permits the transfer of ownership of the commodity at the option of the holders of the futures contract.
(7) It assists in carrying surplus stocks from harvest time through the year and from one year to another.
(8) It also promotes an orderly price structure.