You as a trader should determine
your limits for profit and loss. A dealer should keep limits for the amount and
quantity of commodities; both sold and bought.
If the Futures prices for two months are close to the day-to-day price, it is
the best time to buy.
If the profit is sure to exceed even one rupee per kilo, sell. If there is a
constant loss, do away with the deal even if it is in loss, without waiting
much. You can regain the loss later by selling or buying.
A trader who can make the right decisions would make more profit from the
Futures market than he would perhaps make from the stock market or real estate
deals. While stock market demands at least 50% of the whole value, dealer needs
to spend only 6-15 percent as margin money in Futures Market.
If the trader’s judgment is good, he can make more money faster because prices
tend to change more quickly than real estate or stock prices. On the other
hand, bad trading judgment can ruin you.
Futures are highly leveraged investments. The trader puts up a small fraction
of the value of the underlying contract (usually 10 percent of less) as margin.
The actual value of the contract is only exchanged on those rare occasions when
delivery takes place. Moreover the commodity futures investor is not charged
interest on the difference between the margin and the full contract value.
Most commodity markets are very broad and liquid. Transactions can be completed
quickly, lowering the risk of adverse market moves between the time of the
decision to trade and the trade’s execution.
There is no clear demarcation regarding the deals. Practically anyone can do
any kind of dealings. However, one should take intelligent decisions by
evaluating the ups and downs of commodity in the spot market. Normally, as the
term period increases Futures value may increase. But this need not happen at
all times. As the period decreases the difference in the price in the spot
market will decrease too. On the 15th of every month, the ready market price
and Futures price should be the same.
Hedgers
and Speculators
There are two basic categories of futures participants--hedgers and
speculators.
In general, hedgers use futures for protection against adverse future price
movements in the underlying cash commodity. The rationale of hedging is based
upon the demonstrated tendency of cash prices and futures values to move in
tandem.
Hedgers are very often business houses, exporters, traders, farmers or
individuals, who at one point or another deal in the underlying cash commodity.
Take, for instance, a major food processor, who trade in pepper. If pepper
prices go up he must pay the farmer or pepper dealer more. For protection
against higher pepper prices, the processor can “hedge” his risk exposure by
buying enough pepper futures contracts to cover the amount of pepper he expects
to buy. Since cash and futures prices do tend to move in tandem, the futures
position will profit if peppers prices rise enough to offset cash pepper
losses.
Speculators are independent traders and investors. Independent traders, also
called “locals” trade for their own accounts. For speculators, futures have
important advantages over other investments, as we have explained elsewhere.
