Lots of people ask me this when I tell them we trade futures contracts.  They assume they might be like stocks.  However, they are pretty different. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future and at a market-determined price (the futures price). The contracts are traded on a futures exchange. Futures contracts are not “direct” securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract. Understanding  the origin of futures contracts certainly helps to explain what they are:

The Dojima Rice Exchange in Osaka, Japan c. 1914

Aristotle described the story of Thales, a poor philosopher from Miletus who developed a “financial device, which involves a principle of universal application.” Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or poor and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and many presses were wanted all at once and of a sudden, he let them out at any rate he pleased, and made a large quantity of money.

The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai who – being paid in rice, and after a series of bad harvests – needed a stable conversion to coin.

Hopefully, this helps to explain what we trade.  For more information, attend a live seminar near you, a Thursday evening 7 pm MDT webinar or check with us.  We can email you links to videos or send you a DVD.  Remember, Market Mover Trading only exudes pressure on the market; never pressure on you!

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