A futures contract is a legally binding agreement between a buyer and a seller that calls for the seller to deliver to the buyer a specified quantity (and quality, for commodities) of a specific asset at a future date for a price agreed today.

To make money trading futures you need to be a buyer of the contract if you think the value of the commodity is going to go up, and a seller of the contract if you think it will go down. The settlement takes place at a future date but you always have to buy and sell at todays prices.

When a contract is either bought or sold you don’t have to hold it until the settlement date. It is easier to either sell or buy it when there is a profit in the trade, at the current market price. There are a number of exchanges that regulate the buying and selling of futures contracts such as the CBOT (The Chicago Board Of Trade) and the LIFFE (The London International Futures And Options Exchange.

The futures market was originally started to help people like farmers and merchants manage the risk of their products against the potential supply and demand of the market. In farming for example when there is a bumper crop of say corn the price can fall dramatically and hurt the farmer, but if they have already sold a contract at a certain price they can still get a fair price for their products.

The coffee merchant also experiences the same turbulence in prices due to fluctuating supply and demand. The only difference is that a good price for the farmer is bad for the merchant and vice versa. If neither the farmer nor the merchant knows what the price of beans will be at harvest time, it is difficult for them as they do not know how much money they can spend now in anticipation of future profits.

Normally the farmer and the merchant will form a contract early in the season long before harvest time for the price of the crop, this is in effect a futures contract. Both the farmer and the merchant are able to reduce their trading risks in this way.

Today the futures market has changed a lot from the historical origins. There are now futures contracts on financial instruments such as stocks and bonds. broadly speaking futures contracts are split between commodity type products and financial type products. It is usually not that important because they are rarely held until expiration.

It is important that both the quality and quantity of the produce in the contracts is regulated carefully, this is why the CBOT was founded in 1848. They now regulate many items which are as diverse as silver, corn and bonds

The Chicago Mercantile Exchange (CME) was created in 1919 and has managed a futures market in such things as pork bellies, live cattle and the SP500 index.

The London International Futures and Options Exchange (LIFFE) was founded in 1982. Futures markets traded on LIFFE include the FTSE100, the GILT and Short Sterling. LIFFE has experienced huge growth, over 40% a year, since it started. In 2001 a record 216 million contracts were traded, representing approximately 96 trillion in value.

EUREX started life as the DTB, the German futures exchange. The DTB has always been an electronic exchange and started back in 1990, when electronic exchanges were still considered to be inferior to the open outcry system.

The German Bund was a very heavily traded financial contract and one of the biggest markets on the LIFFE.

Trading Futures online is now very popular amongst traders because of the good leverage and liquidity available, however unless you learn how to trade correctly you can lose a lot of money fast. On the other hand well trained futures traders can make consistent daily profits by following a disciplined and well throughout trading strategy.