Speculators

Were you to speculate in futures contracts, the person taking the opposite side of your trade on any given occasion could be a hedger or it might well be another speculator—someone whose opinion about the probable direction of prices differs from your own. The arithmetic of speculation in futures contracts—including the opportunities it offers and the risks it involves—will be discussed in detail later on. For now, suffice it to say that speculators are individuals and firms who seek to profit from anticipated increases or decreases in futures prices. In so doing, they help provide the risk capital needed to facilitate hedging. Someone who expects a futures price to increase would purchase futures contracts in the hope of later being able to sell them at a higher price. This is known as “going long.” Conversely, someone who expects a futures price to decline would sell futures contracts in the hope of later being able to buy back identical and offsetting contracts at a lower price. The practice of selling futures contracts in anticipation of lower prices is known as “going short.” One of the attractive features of futures trading is that it is equally easy to profit from declining prices (by selling) as it is to profit from rising prices (by buying).

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