Who Trades Futures?

Private Traders

Futures are widely traded by private traders as a flexible, highly leveraged instrument. For private investors, trading futures presents a way unlike any other to invest in commodities, currencies, and a variety of other assets without the initial barriers to entry in a leveraged, cost-effective way. While traders have used futures for thousands of years as a tool for speculation, they remain highly relevant and extremely popular, with billions of dollars traded on futures exchanges across the globe.

Hedge Funds/Institutional Investors

In a similar vein to private investors, hedge funds and the large investment institutions (e.g. pension funds, insurance companies, banks) have trended more towards derivatives trading in recent years as they look to both diversify their portfolios and introduce high-yield (although also high risk) assets to their trading revenue. Enhanced disclosure of fund investing in recent years has shown an increasing level of investment in derivatives, and in particular futures, especially during times of global financial turmoil and widespread caution in the banking and financial sectors.

As funds look to rebuild broken balance sheets, futures are a key component to delivering strong revenue for fund managers and the clients that rely on the performance of their investments.

Manufacturers

Aside from those engaged in speculation and investing purely for profit, futures are also traded largely as a practical instrument for helping to strengthen manufacturing businesses. Commodity prices, by virtue of supply and demand, are in a state of constant flux, and depending on the commodity there may be any number of unpredictable factors playing into its value at any given point. As a manufacturing business dependent on a core supply of these materials, it pays to be able to lock in a guaranteed price for your raw materials ahead of time to guard against potential price rises, and futures provide the ideal basis on which to do so.

Imagine the scenario of a car manufacturer. Manufacturing cars requires steel as a core component of manufacturing. Because cars are not considered a commodity, and not generic, they are less likely to flicker in price at the consumer end, thus rising raw materials costs in the short term hit the profits of the manufacturer. By taking a position in steel futures at today’s prices, manufacturers can lock in a fixed price for their steel for a fraction of the costs of buying in bulk today, ensuring that they are able to plan their cost centres ahead of time without impacting on cash flow. For this reason, futures are particularly popular amongst manufacturing businesses and other organisations dependent on commodity prices.

Primary Sector Suppliers

On the flip side, primary sector suppliers also engage in the trade of futures to help aid cash flow and reap the financial rewards now of delivering their goods later. To extend the above example, consider a steel mill looking to raise revenue in the short term for goods that will be delivered later in the year. The vehicle of the futures contract means not only is it possible to generate instant cash from future produce, but also can be sold on exchanges to the trading public at large, providing for a ready source of liquid investment from speculators, investment funds and manufacturers alike.

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