Stuck in understanding futures vs cash markets.... Help :)

Discussion in 'Trading' started by capitalistsmith, Jul 5, 2012.

  1. Hi all,

    So I dont want to ramble off on one, so i`ll try keep it short and would very much appreciate some experienced understanding to convey it over in layman` terms!

    To keep this short,

    1)How does futures trading effect overall economy when its purely punters buying and selling from one another, speculating over price at a future date BUT all contracts EXPIRE meaning they`re holding pieces of paper, nothing tangible or really worth anything or nor any intention of receiving any goods? I find this confusing?

    2)This maybe ridiculous, but I simply cannot understand the concept of actually buying a contract, lets say, in the wheat market; if you hold that to the expiry/delivery date will that person PHYSICALLY receive 5,000 bushels to a warehouse? If so, does this apply to futures contracts, because from what I understand people `hedge` by buying a futures contract today, to mitigate risk of price fluctuations in the future (to work costings out, as a business more accurately, etc) BUT, from a futures contract, on expiry will they actually PHYSICALLY receive the goods on the specified date?

    3) If most people are speculating all the time and people are purchasing contracts but selling them on, do people get left (probably really daft question) with loads of contracts and having to accept delivery of the goods!? (lol) and if not, then how is this productive for the farmers of wheat when when the buyers and sellers are just exchanging money and they aren't seeing a penny :s?

    Sorry if my logic is way out of wack! I hope you can respect my lack of intelligence when touching on this topic and would really appreciate someone explaining to me very simply whats the crack!

    Thanks in advance!
  2. piezoe


  3. newwurldmn


    Two investor groups:
    Speculators and hedgers. Hedgers have real need for futures because they can lock in costs on supplies or product. Hedgers serve a purpose to the economy because if they can lock in their costs then they can plan their businesses better and thus be more efficient.

    Speculators are just punting around. Speculators serve no purpose to the economy except to make it easier for hedgers to lock in their costs. Speculators also make the markets deeper and more stable. Though this is not always the case.
  4. Is it possible to trade the commodity cash market equivalent or is this just reflective of buying and selling from the futures market? Why is it then, that people will hedge there position, as you`ve said, to lock in pricing to mitigate risk as they have a need for the product or supplies (better cost management/risk) BUT they then close there position and convert it to the cash market on expiry because the specific quality is not what they`re looking for?

    Because from what I understand, on certain ways of trading the commodity futures, if you do not close your position you maybe liable to prepare to take order on the full price of the cash market? Is this correct, and therefore have to fetch your stock from a designated warehouse?

    What type of broker would my trades be executed actually into the market itself other than with a broker and them being market makers? i.e. CFDs, SB...
  5. ==========
    Capitalist S
    Derivatives are a bit complex;
    but i will give some real life examples, not that every detail is exact>>>
  6. I take it you`re making some sort of joke? I respect the fact that I need to read my homework up on it, but in terms of keeping this simple would you have any answer?
  7. emg


    did u read this

    all the answers are in there. I hope u are not a lazy reader
  8. ==========
    Lets say, for example, you & Bunker Hunt reached the same conclusion, long term silver is uptrending. So you & Bunker Hunt try to buy silver in the cash & futures markets without running the price up:D .LOL. The time is early 1970s.

    So far so good, as a matter of fact the plan works waaay to well;
    for many years you & Bunker Hunt have bought cash silver, long futures contracts without running the price up, much :D

    Is trend following dead in 1973 -1979, in silver??;
    Its been 7 years almost, no big trends in silver cash or futures.
    After that, some Arabs & co fund start buying but now theyre accidently or intentionals running the price up.

    I thought for years, the COMEX probably had it in for Bunker Hunt;
    but coulldnt prove it. The more i research it, the more i find the CFTC, CBOT, Comex, plus jack Schwager top trader fragments.

    With thesilver cash markets about $35;
    futures markets about $50, insane leverage ruined /bankrupted Bunker Hunt.
  9. I read what you all write on here anyway ;)

    Guess difference is, wanting someone to explain some things in laymans terms!

    I shall read it all through again :)
  10. #10     Jul 5, 2012