Advantages of Futures Market
Profit from the Rise and Fall of Futures Contract Prices
One of the main advantages of the futures markets is the ability to go Short, giving you an opportunity to profit from falling prices. Therefore, it’s possible to gain from both the upside and the downside of the markets.
Going ”Long” means that you are buying a futures contract to seek profit from its potential price increase. Going ”Short” means that you are “selling” a futures contract to seek profit from its potential price decline (after which you have to “buy” what you had sold in order to close your position).
Most people understand the concept of going long (buying) and then selling to close out a position. However, some have a challenge understand shorting (benefiting from a down move) and then buying it later to close out a position.
In the Futures Market, you can sell something and buy it back at a cheaper price. Think of this logically, if you buy something at $1 and sell it at $10, you have a $9 dollar profit. But, in futures you can sell something at $10 and buy back at $1. Either way, it is a gain of $9.
Understanding Short Sell
Let’s expand on the shorting side a bit; when you buy a futures contract as a speculator, you are simply playing the direction.
When a commercial buyer purchases a futures contract, they are “locking in a buying price” with the intention of buying the actual commodity at a later time.
When a commercial seller is going “short” a position (as in the case of a farmer selling short corn or wheat futures), they actually intend to sell the physical commodity at a specified delivery date, using the short position as a means to “lock-in” a sales price.
But when a retailer buys or sells a futures contract, they are simply playing the direction for a potential profit with no intention of actually buying or selling the physical commodity.
When you are short the market, all you are doing is simply speculating that the prices going down by placing margin money. If you buy back the contract after the market price has declined, you are in a position of profit.