The origins of the futures market is currently located in the agricultural markets of the 19th century. At that time, farmers began selling contracts to deliver agricultural products at a later date. This is done to anticipate market needs and stabilize supply and demand during the off season.

Futures market currently accounts for more than agricultural products. This is a worldwide market for all sorts of commodities including manufactured goods, agricultural products, and financial instruments such as currencies and bonds. A futures contract states what price will be paid for a product at a specific delivery date.

When the futures market is played by speculators, the goods are not really necessary and there is no expectation of delivery. Instead, it is a futures contract traded as the value of the contract itself that changes daily according the market value of commodities.

In every futures contract there are buyers and sellers. The seller takes the short position and buyers are taking a long position. Futures contract set a purchase price, amount and date of delivery. For example: A farmer agrees to deliver 1000 bushels of wheat to a baker at a price of $ 5.00 per bushel. If the daily price of wheat futures falls to $ 4.00 per bushel, farmers account credited with $ 1,000 ($ 5.00 – $ 4.00 X 1000 bushels) and the account will be debited baker with the same amount. Futures accounts are settled every day.

At the end of the contract period, the contract is settled. If the price of wheat futures is still at $ 4.00 the farmer will make $ 1,000 on the futures contract and the bread will lose the same amount. However, bread wheat when buying on the open market at $ 4.00 per bushel – $ 1000 less than the original contract, so the amount he lost on futures contracts made by the cheaper cost of wheat. Similarly, farmers must sell grain on the open market for $ 4.00 per bushel, less than what was anticipated when entering the futures contract, but the profit generated by the futures contract makes a difference.

Baker, however, still apply to buy wheat at $ 5.00 per bushel, and if he does not sign the contract he has been able to buy wheat at $ 4.00 per bushel. He protected himself against rising prices but he loses if the market price falls.

Speculators hope to profit by daily fluctuations in the futures market by buying long (from buyers) if they expect prices to rise or by buying short (from seller) if they expect prices to fall.

FOREX

The foreign exchange market (FOREX) has several advantages over the futures market. FOREX is a more liquid market – as the largest financial market in the world it dwarfs the futures market on the exchange every day. This means that stop orders can be executed more easily and with less slippage in the FOREX that.

FOREX is open 24 hours a day, 5 days a week. Most of the futures market is open 7 hours a day. This makes FOREX more liquid and allows FOREX traders to take advantage of trading opportunities that arise rather than waiting for market to open.

FOREX commission-free transaction. Brokers earn money by setting a spread – the difference between what currencies can be bought and what can be sold. By contrast, traders must pay a commission or brokerage fee for each futures transaction they enter into.

Due to the high volume of trading FOREX transactions are executed almost instantly. This minimizes slippage and increases price certainty. Brokers in the futures market often quote prices reflecting the last trade – not always the price of your transaction.

FOREX is less risky than the futures market because the built-in protection in the trading system. Debit in the future is always a possiblility because of market gap and slippage.