The Difference Between Hedgers and Speculators

The Difference Between Hedgers and Speculators
By Erik Schouman

Throughout wall street futures have had the reputation of being a game that is only played by high-risk speculators. But the truth is they play an important roll in stabilizing prices. There are two distinct types of players in this market.

The hedgers are primarily interested in the commodities. They consist of producers, like farmers, mining companies, foresters, and oil drillers. or they can be users, like bankers, paper mills, jewelers, and oil producers. The main difference between these two types of hedgers is; the producers sell the futures contracts, and the users buy them. The primary concern of the hedger, is to protect themselves against price increases that will undercut their profits.

Then there are the speculators, they trade futures strictly to make money. If you trade in the futures market, but never use the commodity itself, then you are speculator. Most speculators will buy and sell futures contracts, depending on which way the market happens to be going at the time with any particular commodity. Sometimes they will sell their futures contracts for more money than they paid for them, and use the profit that they make to off-set the higher price they will have to pay in the cash market. Either way, there aren't any surprises in added commodity costs because the cash price and the futures price cancel each other out.

Speculators try to make money in the futures market by betting on price move. For instance a speculator might load up on futures pertaining to a particular cash crop in the hopes that if an act of "God" occurs and the crop is damaged that the prices of the crop will soar along with the futures contracts that are based on that particular crop.

If the speculators happen to be right, then the futures contracts for that commodity will be worth more than they paid for them. This in-able them to sell their contracts for a profit. However if they are wrong and the crop that they are betting on turns out to be a bumper crop that year, the bottom will fall out and the speculators will be squeezed dry.

Futures and options are very different from, stocks, bonds, and mutual funds because they fall into what is known as zero sum markets. This simply means that every time someone playing in this market makes a dollar, someone else loses a dollar in this market.

To learn the truth about options trading and discover some useful options trading tips then visit: http://www.LearningOptionsTrading.com

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The Facts About Futures and Options Trading

The Facts About Futures and Options Trading
By Erik Schouman

For many investors, trading in futures and options is considered to be a high risk investment, while others perceive futures and options to be protection against dramatic price changes that take place on a daily basis in the stock market.

Futures and options can be complex because they are derivative, or hybrid investments. In stead of representing ownership, like stocks or the promise of a loan repayment, with bonds. Futures and options are once or twice removed from a real product. A futures contract with a crude oil company, is a bet as to which way the oil prices are going to be moving. what happens to the actual product itself is of little concern to this type of investor.

For some investors, trading in futures and options are a way of reducing their investment risk. For instance farmers that agree to sell their grain at a good price are protected if the price of grain should drop. investors that sell options on stock that they own can offset their losses if the market should collapse. However the majority of investors that dabble in futures and options, do so because the possibility of sustaining a huge loss is balanced by the opportunity of an enormous gain. Individual investors playing in this area of the market are usually small players, because the stakes are high and the returns are unpredictable.

Although futures and options contracts are deals that are made for the future, the future that they are talking about when they make the contract isn't very far away. Take for instance futures contracts that are made on grains and other food sources usually will expire with-in a year of the contract being made, but investors can find contracts on certain financial futures that will last at least five years.

Most options contracts will expire with-in five months or less, although a few options have been known to last as long as seven months. Although there is an exception to this rule that is known as LEAP options, these are long-term options that can last up to thirty months.

To learn the truth about options trading and discover some useful options trading tips then visit: http://www.LearningOptionsTrading.com

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http://EzineArticles.com/?The-Facts-About-Futures-and-Options-Trading&id=552750

The Difference Between Hedgers and Speculators

The Difference Between Hedgers and Speculators
By Erik Schouman

Throughout wall street futures have had the reputation of being a game that is only played by high-risk speculators. But the truth is they play an important roll in stabilizing prices. There are two distinct types of players in this market.

The hedgers are primarily interested in the commodities. They consist of producers, like farmers, mining companies, foresters, and oil drillers. or they can be users, like bankers, paper mills, jewelers, and oil producers. The main difference between these two types of hedgers is; the producers sell the futures contracts, and the users buy them. The primary concern of the hedger, is to protect themselves against price increases that will undercut their profits.

Then there are the speculators, they trade futures strictly to make money. If you trade in the futures market, but never use the commodity itself, then you are speculator. Most speculators will buy and sell futures contracts, depending on which way the market happens to be going at the time with any particular commodity. Sometimes they will sell their futures contracts for more money than they paid for them, and use the profit that they make to off-set the higher price they will have to pay in the cash market. Either way, there aren't any surprises in added commodity costs because the cash price and the futures price cancel each other out.

Speculators try to make money in the futures market by betting on price move. For instance a speculator might load up on futures pertaining to a particular cash crop in the hopes that if an act of "God" occurs and the crop is damaged that the prices of the crop will soar along with the futures contracts that are based on that particular crop.

If the speculators happen to be right, then the futures contracts for that commodity will be worth more than they paid for them. This in-able them to sell their contracts for a profit. However if they are wrong and the crop that they are betting on turns out to be a bumper crop that year, the bottom will fall out and the speculators will be squeezed dry.

Futures and options are very different from, stocks, bonds, and mutual funds because they fall into what is known as zero sum markets. This simply means that every time someone playing in this market makes a dollar, someone else loses a dollar in this market.

To learn the truth about options trading and discover some useful options trading tips then visit: http://www.LearningOptionsTrading.com

Article Source: http://EzineArticles.com/?expert=Erik_Schouman
http://EzineArticles.com/?The-Difference-Between-Hedgers-and-Speculators&id=554449