Futures trading is a type of investment that involves predicting the future value of various types of goods and services.

Futures trading as we know it today evolved from farmers selling their crops to dealers and committing to future exchanges of goods for a set price. A farmer would, for example, agree to deliver a few kilos of a certain produce, like wheat or barley, to the buyer on a future date.

This type of agreement was beneficial to both parties as the farmer knew how much he would be paid for his produce and the buyer could plan costs in advance. The two parties may have exchanged a written contract, now known as a futures contract.

Futures contracts soon became commonplace and were used as collateral for many different products and services. It then became possible for these contracts to change hands before the delivery date was reached. If the buyer decided they didn't want whatever it was they had bought then the contract could be sold to someone else who did need the goods in question. This situation also works vice versa for the person selling their commodities.

The price for goods and services would increase and decrease depending on what was happening in the market and before long people who had no intention of ever buying goods or services began trading the contracts and thus the concept of futures trading was born.

Futures trading is therefore a type of investment which involves speculating on the price of a certain commodity going up or down in the future. The type of commodity varies widely and could even be something you see and use in everyday life; from cotton used to make clothes, wheat used in bread or the gold that is used to make jewellery, there are thousands of different commodities that you could choose to trade in.

All of these different commodities are traded every day between hundreds-of-thousands of investors from all around the globe. The aim of futures contracts trading is to make a profit by buying a commodity at a low price and then selling it on at a higher price.

Futures trading is also referred to as ‘paper' trading or investing because it is rare for investors to actually hold the physical commodity, it is generally a piece of paper known as a futures contract that is bought and sold.

Futures contracts are bought and sold before they reach their expiry date and many short-term traders only hold their contracts for a few hours, or even minutes.

The expiry dates of different commodities vary so you are able to choose the contract that suits you best. The closer a commodity is to its expiry date the more liquid it generally is and prices are therefore truer and less likely to fluctuate.

Shares can be traded in a similar way and this is called contracts for difference (CFDs) trading. CFDs trading allows you to make money on share price movements without actually buying the shares.

This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.

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