When it comes to trading on the futures market there are two types of players. The hedgers and the speculators. Each one plays the game a little differently. Below we will discuss how hedgers and speculators trade on the futures market. Use this information to determine which type of futures trader you want to be.
By definition, a hedger is someone who buys or sells in the futures market with the sole purpose of securing the future price of a commodity. The intention is always to sell the commodity in the near future on the cash market. When done this way you are better protected against price risks.
The buyers of the commodity, which are the holders of the long position, are trying to secure the lowest price possible. The sellers of the commodity, referred to as the short holders, are doing the opposite of the buyer. Instead of trying to secure the lowest price possible, they are trying to secure the highest price possible.
Both parties are provided with a definite price certainty through the futures contract. This helps reduce the risks that are often associated with price volatility.
Hedging can also be used to lock in the best possible price margin between raw materials cost and the final cost of the product being sold.
Unlike hedgers, speculators focus on benefiting from the risks rather than minimizing them. Their goal is to profit from the price changes while hedgers are trying to protect themselves from it. No matter what the investment is, a hedger is always looking to minimize their risk. Speculators on the other hand seek to increase their risk so they can ultimately make more money.
In the futures market speculators and hedgers do business together quite often. If a speculator decides to buy a contract low so it can be sold at a higher price in the future, chances are that contract will be purchased from a hedger. Speculators have no desire to own the commodity being bought or sold. Instead they enter the market with one goal and that is to make a profit.
The futures market is a very fast paced market. Things are constantly moving and changing in this type of market. Because of this both speculators and hedgers can benefit from each other. When a contract is about to expire, information entering the market will be more reliable. This results in a more accurate representation of supply and demand and the price that corresponds with the commodity in question.
So what type of futures trader are you? No matter which type of trader you choose to be, make sure you understand the market in and out. That is the only way to ensure you make the most possible money.