Futures as an Investment
When a trader buys a futures, he locks in a purchase price for the underlying commodity. Similarly, when he sells a futures, he locks in a selling price of the underlying commodity. How, then, does one make money trading futures? Well, futures prices move around all of the time, that is, they are volatile. Prices of agricultural commodities, for example, may rise in response to unfavorable weather conditions, increased demand by importers, or spread of plant diseases, and fall in response to abundant supplies or a shift in consumer preference. If prices go up after a trader buys a futures contract, then he earns profit since the futures contract has increased in value.
For example, if you buy one gold futures at $340 per ounce and two weeks later, the price of gold futures is trading at $350 per ounce, then your futures contract is now worth $10 per ounce more than when you bought it. One futures contract represents 100 ounces of gold, so the total profit on your gold futures position is $1,000. However, gold prices could have fallen instead, in which case the trader would have suffered a loss.The challenge is to anticipate price movements correctly and make the appropriate trade. If a trader expects prices to rise, he will buy futures or, he can buy call options, and if he expects prices to decline, he will sell futures or, he can buy put options. If his expectations turn out to be correct, then he will make money. If not, he will lose money. Realistically, it is virtually impossible to be right all of the time. In fact, many traders are wrong more often than right. Managing risk is the key here.