A futures contract is a legally binding agreement between a buyer and a seller that calls for the seller to deliver to the buyer a specified quantity (and quality, for commodities) of a specific asset at a future date for a price agreed today.

The important point to remember when trying to trade futures for a profit is that it is the current price that is being traded and not the settlement price, which is at the future date. This means we want to be buyers of the contract if we think that the price will increase, and sellers of the contract if it looks like it is going down.

When a contract is either bought or sold you don’t have to hold it until the settlement date. It is easier to either sell or buy it when there is a profit in the trade, at the current market price. There are a number of exchanges that regulate the buying and selling of futures contracts such as the CBOT (The Chicago Board Of Trade) and the LIFFE (The London International Futures And Options Exchange.

The origins of the futures markets can be traced back to farmers and merchants who wanted method managing the risks in their business against bad weather or failed crops. The use of futures contracts helps them to maintain a more constant price for their products when the demand can vary a lot.

The farmer and the merchant are often trading against each other, trying to get the best price at both ends of the trade. By using futures they can limit the risk of waiting until the crop is actually harvested when the supply and demand can change dramatically. It also helps them to be able to plan a head knowing what profits they can expect to obtain.

It makes sense for the farmer and the merchant to get together early in the season and agree the price to be paid for the produce at harvest time. This way the farmer can plan his expenses and the merchant can set his prices. In effect they are negotiating a type of futures contract, which provides them a way of eliminating the risk they face due to the uncertain future price of coffee beans.

Today the futures market has changed a lot from the historical origins. There are now futures contracts on financial instruments such as stocks and bonds. broadly speaking futures contracts are split between commodity type products and financial type products. It is usually not that important because they are rarely held until expiration.

The CBOT was started in 1848 for the benefit of the farmers and merchants. The exchange was to regulate both the quality and quantity of the actual crop that was being traded. Today the CBOT offers many contracts on items like wheat, silver, corn, bonds and soybeans.

In 1919, the Chicago Mercantile Exchange (CME) was created. The exchange has provided a futures market for many commodities including pork bellies & live cattle. In 1982, it introduced a futures contract on the S&P 500 stock index.

In London the big financial futures exchange is the London International Futures and Options Exchange (LIFFE). Here financial instruments such as the FTSE100, the GILT and Short Sterling are traded, the exchange is relativily new and opened in 1982.

In Germany the EUREX is a big exchange and is 100% electronic, it started out as the DTB in 1990 before electronic systems became popular, at the time open outcry pits systems were still in use by many exchanges.

One of the biggest futures markets in the world was the German Bund, which, during the first half of the 90’s, was the biggest contract traded on LIFFE. The Bund pit on the floor of LIFFE was the biggest and the most active, it was the heart of the trading floor. The Bund was also traded on the DTB, but in much smaller quantities.

Trading Futures online is now very popular amongst traders because of the good leverage and liquidity available, however unless you learn how to trade correctly you can lose a lot of money fast. On the other hand well trained futures traders can make consistent daily profits by following a disciplined and well throughout trading strategy.