The futures market tends to be based on leverage. This is the concept that allows a trader to invest in a particular contract without having one-hundred percent of the value of said contract at their disposal at the moment of investment. The trader just puts up a fraction of the contract value. The amount of leverage that the trader gets to use will depend upon what the broker allows.

The potential for loss is capped for the trader due to the leverage that they are using. At the same time, the ability to make larger profits is also capped at whatever amount of real money they have on the line.

The trader and the market trade contracts back and forth in the hopes of making profits off of each other. It is important to note that there is an end user to these contracts somewhere down the line. The physical delivery of the assets that one is trading in must be met at the expiration of the contract. Thus, those who have no intention of delivering the actual goods that they are trading in need to be prepared to offload their futures contracts before the expiration of that contract.

The futures market is all about speculation as we have already discussed. Thus, it makes it possible for a trader to take either a long or a short position on any asset that they desire. Taking a long position means holding the contract in favor of the price of the asset moving up while taking a short position means just the opposite. The concept of trading a long position is pretty self-explanatory and makes sense to most traders, but the idea of going short is a little more complicated and not always understood.

Taking a short position against an asset means borrowing that asset at the current price with the intention of selling it immediately. One does not own the asset but sells it regardless. Thus, that same trader must replace the asset that they have sold (as it did not belong to them). They replace it by purchasing the same asset at a later date. The goal of the short-seller is to buy the asset at a lower price down the road.

It can be profitable to short-sell an asset, but there are a number of risks involved as well. The value of the asset has no ceiling and can thus go to infinity in theory. Rapid price increases can leave the short-seller on the hook for replacing a very valuable asset in no time at all. No one wants to find themselves in those shoes, and it is thus advisable that anyone looking to get involved with short-selling wait until they have a lot of experience trading futures beforehand.

The futures market opens the door to hedging as it allows an investor to take a position in the futures market that is opposite of their position in other markets. In other words, perhaps there is an investor who owns a lot of oil company stocks but is concerned that the value of those stocks may decrease in short order. He or she could take out a short position in the futures market to allow for profitability on their position regardless of where the price of oil actually ends up.

Balancing out a portfolio is recommended by practically every financial expert who has ever lived, and it is certainly a wise choice for those just getting started in the investing world. There are a lot of markets out there to check out, but the best ones are those that allow you the opportunity to balance out your portfolio completely.

Finally, note that the futures market is fully regulated by a governmental agency known as the Commodity Futures Trading Commission (CFTC). They are a federal agency created by Congress starting in 1974. The purpose of this commission is to review cases of unfair trading practices and illegal brokers. There are more than a few of these bad apples that have cropped up in years gone by, and it is a good thing the CFTC is there to weed them out as they come into being. You can rest assured that your trading and investing are being protected by this agency.