To trade futures you open an account with a futures brokerage firm known as a futures commission merchant (FCM), who will execute and record your trades, and monitor and advise you of your
margin account
obligations. You may deal with the FCM directly or go through an introducing broker (IB) or commodity trading advisor (CTA). As with stocks and bonds, you pay commissions and fees to trade futures.
You give your broker an order to buy or sell a futures contract, either to open a new position or to offset and cancel an existing position. Your broker in turn transmits the order to the appropriate
exchange
floor or
electronic trading system.
You may also invest in futures through a commodity pool, which resembles a mutual fund. Your investment is pooled with assets from other investors, and the commodity pool operator (CPO) trades futures contracts using those funds. Or, you may work with a commodity trading adviser (CTA), to whom you give authority to trade in your account. Both CPOs and CTAs are typically paid based on their performance.
Trading in action
Traditionally, futures were traded using the
open outcry
auction method on exchange floors divided into trading pits. Today, more and more trades are executed electronically, and trading in some commodities is entirely electronic. On some exchanges, electronic trading systems operate alongside live trading. On others, open outcry occurs during the day and e-trading on those commodities takes place during the evening and overnight. Other exchanges are entirely electronic, with no trading floor at all.
Normal or inverted?
The usual price pattern of the futures market is increasing contract prices the farther out the delivery month. For example, prices for December corn futures will be higher than September, and March prices higher than December. The difference in price represents the carrying charge, or cost, of storing the corn for the extra months after harvest. As the harvest approaches again, the prices drop and the cycle begins all over. When prices follow this pattern it is called a normal market or
contango.
An inverted market, or backwardation, occurs when a there's a supply shortage in a particular commodity. In the short term, hoarding increases the price of the nearest delivery months' contracts, while prices for contracts farther out decrease.
To trade futures you open an account with a futures brokerage firm known as a futures commission merchant (FCM), who will execute and record your trades, and monitor and advise you of your
