Syndicate
Futures or Long Term Operations over Products
The average investor has certain knowledge of the investment tools we have until now analyzed. But with basic products the picture is totally different.
What do you understand by basic products? How and in what circumstances do the basic products fit in the financial planning of persons?
By basic products we are talking about wheat, corn, soybeans and other agricultural products, but also about gold, silver, platinum, wood, gasoline, fuel, etc.
At first, farmers sold their harvest when picked, and had to be glad with what they got for them. Today still some farming products are sold in this way on the cash market.
However, when people talk about products or raw materials as an investment, they are usually referring to future contracts over them. The big cereal distributors and the final buyers of these raw materials (for example, companies dedicated to the elaboration of food products) use future contracts to ensure, in a future date and at a fixed price, the supplies of a determined volume of a specific raw material. Many farmers liked the idea of selling their crops at a determined price before the harvesting periods.
The future contracts about products where seriously constituted when in the farming markets (in which farmers and cereal distributors made deals) a third party was introduced (investors and speculators), which contributed with liquidity.
To make yourself an idea of what these future contracts of products represented, you have to know that a contract of this type gives the parts the right to buy or sell in a fixed date a certain quantity of a determined product at a price fixed beforehand. The contract only gives the right to buy or sell the product, never the property of it. For example: if you, as an investor, think that a certain product is going to rise in price in the future, what you do is to “Tie up” a future contract: that is, you buy a future contract that gives you the right to buy that product at a determined date and at a prefixed price. If, on the contrary, you think that in the future the price of that product is going to drop, what you try then is to “untie” a futures contract; that is, you sell the future contract at the present price with the hope that it will be possible to rescue or re buy your obligation of selling the product before the date of caducity of the contract.
Due that there exists a great activity in its marketing, the future contracts about products are a very liquid kind of investment.
Since the creation of the Chicago Board Trade, the market of future contracts has expanded: In the present there are eleven commerce stock exchange market in the country, as well as contracting places in the most important financial centers in the world.
In this same expansionist line, the variety of futures contract have extended to far more than agricultural and industrial products an now they embrace financial futures such as promissory notes, treasury bills and notes, foreign currency and stock exchange indexes, and other tangible and intangible products. The radical variations of prices are a rule, not an exception, in future contracts.
Although future contracts present the advantage of their liquidity, you have to be conscious that they present a high level of risk due to its high leverage factor. It is very possible for you to loose a sum equal to several times your original investment margin.
The risk is present due that the weather, world economy and political facts can give place so much to an excess of the product or to a shortage of the same.