How futures trading works
For every buyer, there is a seller and for every seller, there is a buyer. Matching these two together so that a trade can be consummated requires the participation of a host of individuals and organizations, each having specific roles, which in the aggregate make the futures market the efficient mechanism that it is today.
Throughout this section, reference is made solely to the futures market only for convenience and simplicity of presentation. The market how futures trading works options on futures is structured in very much the same manner. A futures exchange is a meeting place where futures contracts are bought and sold. Trading occurs against a background of regulatory surveliance and guidelines from the exchange itself and from the Commodity Futures Trading Commission CFTC. Each exchange has its own list of products that it trades, and each how futures trading works is traded in a designated futures trading pit.
A trading pit is an area of floor, usually round with concentric steps leading down into the center. The trading pits are each divided into a number of sections designated how futures trading works trading in particular contract months.
No trading may occur outside a contract's assigned pit, nor is trading permitted at any time other than during those hours which have been designated by the exchange. Some exchanges also use automated trading facilities or computer networks which serve as trading pits. In addition to providing the market place for trading futures and regulating trading within its pits, futures exchanges also design and specify their futures contracts.
Futures contracts are very specific in terms of the quality and quantity of goods underlying the contract. You may have wondered who determines these specifications.
The answer is the futures exchange. Working with participants in the industry such as traders, fund managers and natural hedgers, how futures trading works futures exchange designs a contract to meet the greatest need.
If the exchange succeeds, it will have designed a how futures trading works product that many players can use or trade, and volume in the futures will grow.
Contract specifications can sometimes be changed by the exchange, and is usually done to keep the contract viable. To stand in a trading pit, a trader needs to buy an exchange membership, pay annual dues, and register with various regulatory agencies. Naturally, few people would trade futures if it required that they stand in the trading pit.
To solve this problem, in steps the futures broker. A futures broker acts as a communication link how futures trading works the trading pit and the trader, taking orders from the customer, and executing them in the futures pit.
By law, futures brokers do not have the authority to take customer funds and hold them in deposit. Only an FCM can do this. For this reason, a futures broker needs to team up with an FCM in order to provide order execution services to its customers. In a literal sense, it stands as a buyer to every seller and a seller to every buyer. How futures trading works means that a futures trader does not have to worry about any default of a futures counterparty.
What happens if that person cannot pay? Does A sacrifice her profit? The answer is "NO". The clearing corporation guarantees the transaction. The clearing corporation's elimination of such counterparty credit risk provides a great benefit to the futures and options markets. One may wonder how the clearing corporation does this. The answer lies in the margin deposit that every other futures trader must make before trading any contract.
This margin is available to the clearing corporation and, how futures trading works with other reserve cash and various protection funds, are used to cover any customer default.
A clearing corporation is composed of clearing members, most of which are large FCM's. It is a mark of distinction for an FCM to be a clearing member. The primary purpose of the NFA is to ensure, through self-regulation, high standards of professional conduct and financial responsibility on the part of the individuals and organizations that are its members: In connection how futures trading works its regulatory responsibilities, how futures trading works NFA conducts periodic audits of its members' financial and other records, monitors sales practices and provides a mechanism for the arbitration of futures related disputes between NFA members and the investing public.
How are Stock Futures different from Stock Options? In stock options, the option buyer has the right and not the obligation, to buy or sell the underlying share. Risk-return profile is symmetric in case of single stock futures whereas in case of stock options payoff is how futures trading works.
Also, the price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, volatility of the underlying stock affect the price along with the prices of the underlying stock.
What are How futures trading works Futures? How are Stock Futures priced? What are the opportunities offered by Stock Futures? How are Stock Futures settled? Can I square up my position? When am I required to pay initial margin to my broker? Do I have to pay mark-to-market margin? What are how futures trading works profits and losses in case of a Stock Futures position?
What is the market lot for Stock Futures? Why are the market lots different for different stocks? What are the different contract months available for trading? What is spread trading on BSE? As an investor, how do I start trading in Stock Futures? What securities can I submit to the broker as collateral? How does an investor, who has the underlying stock, use Stock Futures when he anticipates a short-term fall in stock price?
How can an investor benefit from a predicted rise or predicted fall in the price of a stock? What is pair trading?