How Long Hedging and Short Hedging Works in Futures Trading

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Futures trading is used every day by people who are looking to buy and sell different kinds of commodities, such as corn, gold, wheat, lumber, and many others. People trade these commodities in an attempt to make a profit by buying low and selling high. Rarely ever do the people have a physical hold on the commodities. Instead, the commodities are represented by a simple piece of paper called a futures contract.

The futures contracts contain an expiration date, which varies depending on the type of commodity that is being traded, but each contract lists how much of the particular commodity is being traded and the quality of that commodity. It lays out all the specific details so there is no doubt about what the trade is for. The contract does not have to be held until its expiration date and can be cancelled at any time. In fact, it?s not unusual for some traders to cancel their contracts within hours of obtaining them.

Traders are known as hedgers or speculators. Speculators are the people who trade futures in an attempt to make a profit. Hedgers are the people who either produce or actually use the commodity that is being traded. They trade futures in an attempt to either lower the price risk or institute the prices for the commodities. Hedgers can be separated into two different categories: short hedgers, also known as the sellers, and long hedgers, also known as the buyers. Basically, a short hedger wants to keep prices from declining so they can sell high and long hedgers want to keep prices from increasing so they buy low.

Long hedging in futures trading is a transaction that protects against the possibility that prices of the commodity being traded will increase later on. This practice benefits both the buyer and the seller of the traded commodity. Short hedging, on the other hand, does the opposite. It protects against the possibility that there will be a decrease in the prices of the traded commodity, again benefiting both the buyer and seller.

For anyone who is not familiar with futures trading and how it all works, this information could get quite confusing. The good news is, there is a wealth of information all over the internet that can help to educate you on all the ins and outs of how futures trading works. There are endless examples of situations that explain in detail how futures trading would work in those particular situations. The examples also illustrate what would happen if prices suddenly increased or decreased and the effects those price fluctuations would have on those situations.

If you are looking to participate in futures trading, it would probably be wise to not only study up as much as you can about how it all works, but you should also seek out an investment professional and obtain their in-depth expertise and advice on what exactly you need to do and where a good place to start would be.



Source by Erik Kearney

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