Futures traders are sometimes depicted as high-risk gamblers. In fact, there are two distinct types of traders in the futures market: the
hedgers
and the
speculators.
Both perform an important function in the market.
Hedgers are interested in commodities, or more particularly, the changing value of the commodity underlying the futures contract. Hedgers can be the commodity producers, like farmers, mining or oil drilling companies, and foresters. Or they can be the commodity users, like food companies, jewelers, and furniture manufacturers. Similarly, they can be mutual fund or pension fund managers whose assets are affected by changes in interest rates or stock indexes, or they can be international companies paid in foreign currencies.
Speculators, on the other hand, trade futures only to make money. The production and use of the underlying commodity holds no particular interest to them, except as it relates to how the market might react to events affecting the commodity, like droughts, shortages, changing tastes, and new market demand.
It's mutual
Hedgers and speculators are necessary to one another. Speculators are willing to take risks in the market, by buying or selling futures contracts on the opposite side of the hedgers, who seek stability. Because the two parties are in the market for different reasons, the relationship is beneficial to both.
A historical perspective on futures
The oldest futures contracts date back to 17th century Japan, when rice tickets provided landlords who collected rents in rice with a steady secondary income source. They sold warehouse receipts for their stored rice, giving the holder the right to a specific quantity of rice, of a specific quality, on a specific date in the future.
The buyers who paid for the tickets could cash them in at the appointed time or sell them at a profit to someone else. Like futures contracts today, the tickets themselves had no real worth, but they represented a way to make money on the changing value of the underlying commodity — the rice.
Speculators, on the other hand, trade futures only to make money. The production and use of the underlying commodity holds no particular interest to them, except as it relates to how the market might react to events affecting the commodity, like droughts, shortages, changing tastes, and new market demand.
