Futures market can be extremely perilous
September 1, 2003
By Copley News Service
The futures market that generated and might have destroyed Gary Bielfeldt's financial empire is notoriously perilous for even the most experienced traders. For more than a century, fortunes have been made or lost in its volatile trading pits in a span of minutes.
At its simplest, futures trading is exchanging a commodity like gold or corn at a price locked in today with delivery set for sometime in the future. The market was spawned in the Midwest in the 19th century as a crucial hedge for businesses against sharply rising or falling prices of commodities crucial to their activities.
For instance, a food manufacturer who relies heavily on corn might protect against an anticipated rise in corn prices by locking in a price today for corn to be delivered three months from now. If the price goes up, he avoids the increase. But if the price goes down, he misses out on the savings. In either case, he knows in advance what he will pay for the corn three months down the road.
The futures market eventually attracted speculators like Bielfeldt who are just interested in making money off constantly rising and falling prices. They don't intend to take delivery of the commodity they agree to buy. They plan to resell the contract at a profit before the delivery date.
They can agree to either buy or sell on a future date. If they believe the commodity's price will go up, they buy, known as "going long." If they believe it will go down, they sell, which is called "going short." Either way, the trader expects to make money.
But, as traders could tell you, it's a risky game.
"While futures trading can be very beneficial to hedgers and very profitable to some speculators, it is definitely not for everyone," warns the Web site of the Commodity Futures Trading Commission, which oversees the futures markets. "The majority of people who speculate in commodity futures or options lose money."
Additional information about futures trading can be obtained on the Web sites of the Commodities Future Trading Commission at www.cftc.gov or Chicago Board of Trade at www.cbot.com.