2) Futures Fundamentals: A Brief History

Some 150 years ago, before the North American futures market started, farmers would grow their crops then bring them to the market to sell. Without knowing before their arrival to the market how much demand there was, supply often exceeded the demand and many farmers took losses. Inversely, when a particular good was out of season, it became very expensive because it was no longer available.

During the middle of the 19th century, people thought of making central grain markets and a central marketplace.  The purpose of these markets were to allow farmers to choose to bring their goods for selling either by immediate delivery (spot trading) or for forward delivery. Forward delivery contracts or forward contracts, were the beginning of today’s futures contracts. This concept saved a lot of farmers the loss of crops and/or profits. It also helped stabilize prices and supply during off-season.

These days, the futures market is no longer limited to agricultural goods. Today, trading for currencies and financial instruments (treasury bonds, securities, etc.), a mixture of farmers, exporters, importers, and speculators can be seen in the futures market. Modern technology has made it possible to see commodities prices despite geographical differences. A farmer in the US, nowadays, can easily match a bid from a buyer in Europe.