Robert Kiyosaki - Rich Dad, Poor Dad
FUTURES CONTRACTS
Futures contracts have only one buyer and one seller at any moment in time. The creation of a contract simply depends on one buyer and one seller agreeing on a price. This is accomplished by "open outcry" in the pits on the floors of the exchanges. All other specifications, except for the number of contracts to be bought or sold, are standardized.
You, as a trader, transmit your trading order (to buy or to sell a futures contract) to your broker. Your broker in turn communicates with the order desk on the floor of the exchange that trades the specific futures contract you want to trade. The floor order desk gives your trade to the floor trader in the pits. Once your order is filled, the process is reversed and your broker calls you with your fill (the price at which you bought or sold the contract).
To offset your position in the futures market, you need only to find a substitute seller or buyer. You do this by giving your broker an equal but opposite order to your current futures position. Only about 3 percent of futures contracts are actually delivered. Therefore, initiating and offsetting futures positions are carried out in the same way.
Because futures contracts are standardized, ownership, transfer, and substitutions are accomplished without endangering the original purpose of the forward markets—which is to set price, facilitate delivery, and transfer risk. Futures contracts can change hands many times before their delivery date (expiration). Historically, the increased use of futures by speculators makes the market more efficient and actually reduces price fluctuations.
Without active involvement of speculators, buyers' and sellers' price differences (the bid and offer price spread) would widen and prices would fluctuate more dramatically. Furthermore, without this speculative activity, the consumer would have to pay higher
food prices to compensate grain dealers for the risk of violent price swings resulting from temporary gluts and shortages.
Jim Cramers Real Money Sane Investing In An Insane World Cramer
