A financial instrument that involves writing a contract that promises to buy or sell a
commodity (ie,
canola, or
gold) at a future date at today's prices. Purchasers of futures generally fall in to two categories:
Hedgers - these are people whose business involves the commodity. They buy futures as a
hedge, insurance against the possibility of changing prices. For example, say a canola farmer buys futures at today's prices for his crop due to be sold in nine months. If prices drop, his loss is alleviated a bit by holding the futures. If prices go up, he will lose a bit of money on the futures, but his profitable crop will
offset it.
Speculators. These are people who don't deal in the actual commodity, and just want to profit from how they expect the commodity's price to change. These represent the majority of futures traders - only about 2% of futures end up with actual exchanges of goods.