The future market is an auction market in which participants sell and buy commodity and futures contracts for delivery on a specified future date. Way back then, trading was carried on through yelling and hand signals in the trading pit, luckily we’re in the 21st century, like most other markets, futures exchanges are mostly electronic.
For anyone to fully understand what a futures market is, it’s important to understand the basics of futures contracts, assets traded in these markets.
Futures contracts are made in an attempt by producers and suppliers of commodities to avoid market volatility. These suppliers and producers negotiate with an investor who agrees to take on the risk and the reward of the volatile market.
In other words, should a coffee farm sell coffee beans at R50 per kilo to a roaster and the roaster sells that roasted kilo at R100 per kilo and both are making a profit at that price, they’ll want to keep those costs at a fixed rate? The investor agrees that if the price for coffee goes below a set rate, they’ll pay the difference to the coffee farmer. Should the price go higher than a certain price, the investor gets to keep profits. For the roaster, if the price for green coffee beans goes above an agreed rate, the investor pays the difference and the roaster gets the coffee at a predictable rate. If the price for green coffee beans is lower than an agreed upon rate, the roaster pays the same price and the investor gets the profit.
It’s in these futures markets or futures exchange that financial products are bought and sold for delivery at some agreed-upon date in the future with a price fixed at the time of the deal. Futures markets are for more than just agricultural based contracts, and now involve the buying, the selling and the hedging of financial products and future values of interest rates. Future contracts can be created as long as open interest is increased, not like with other securities which are issued. The size of future markets (which usually increase when the stock market is uncertain) is larger than that of commodity markets and are a key part of the financial systems in place.
There are in fact three ways for corporations, institutions, and individuals to trade forex:
Large futures markets run their own “cleaning house” where they can take the revenue for the trading itself and from the processing of trades.