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This section is not a glossary of the terminology commonly used by investors in the realm of Commodity Markets and Futures Trading. It is one thing to look up definitions of the buzz words used in any business and quite another to understand how the terminology fits together to form a contemporary, clear picture.
Think about it, and probably you have heard words and terms tossed about by market analysts and advisors, while observing listeners who probably did not fully grasp the meaning, proceed as if they did. Nobody wants to be perceived as not being knowledgeable of how things work in such a popular topic as the markets. But, it is understandable that most people are only vaguely tuned in to the language of investors and speculators because, even if they hear the talk several times a day, it is not their full time pre-occupation. After all it’s not their job to know. Maybe this is more or less where you fit in. Well, it can be a costly mistake to proceed without really understanding what it is you are proceeding with. Stock Trades always tries to give information with application. That is why this article is here in place of a dictionary or glossary. Let’s get a handle on what the talk really means. Here, we will walk through some futures topics, throwing out lots of terminology, whether needed or not, just to put it into a contextual application that makes it more understandable than a straight out definition. Speculate or Invest?So you are thinking about speculating in the futures market. We deliberately want to specify speculate over invest. To invest is to put your money to use in a way you should reasonably expect will yield a profit or income, but by speculating, you enter into serious risk for the reward of winning big. We must consider the futures market in this way because it is not as predictable as trading shares in the stock market. In fact, you don’t even trade futures. What you do is enter into a contract whereby you agree to buy or sell a product at a future date with the price and delivery terms set at the making of the deal. Even the product you may buy or sell can be a little bit difficult to define or identify. Not always so concrete as a stock certificate, futures can be a contract to sell a basic commodity such as potatoes, or to buy a misunderstood futures mutant like a derivative. Derivatives are futures contracts whose price is derived from one or more underlying. Here we go again. An underlying; what’s that? Well, an underlying is something whose price affects the price of the derivative asset that is linked to it. So, you can contract in futures based on a mining stock index, and the price of XYZ Gold Mine stocks, which is a stock market traded security affect the index of all gold stocks or perhaps a price index of all mining stocks, which makes XYZ an underlying. That probably doesn’t seem important to you right now, but will later when we add hedging risk to the talk we talk.
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