All futures contracts are generally made for the purpose of
speculation or hedging. As such, the general procedure for settlement
is the neutralization of the original contract by an opposite contract
on settlement, so that only difference between the current and the
contract price is paid or received. It is rare that actual delivery of
the goods is taken, and the price paid in settlement of futures
contracts.
Futures trading is the most notable feature of
business activity on the commodity exchange. In fact, the commodity
exchanges are organized mainly for futures contracts. The futures
contracts are made for two distinct purposes: speculation and hedging.
Accordingly, they are either speculative or hedging contracts.
Speculative activity is such an important part of the commodity
exchanges that commodity exchanges are sometimes referred to as the
speculative market.
All speculation represents an attempt on the
part of individual to peep far into the future out of the window of the
present. Speculation refers to an attempt to estimate the future trend
of prices and proceed on that basis, to result in profit. Commodities
may be bought at the current price with the assumption of selling them
at a higher price in future or vice-versa.
The line between
gambling and speculation is very thin. On the surface both appear to be
the same, but in fact speculation refers to the taking up of legitimate
enterprise (purchase or sale of property, commodities, etc.) on the
basis of an analysis of market trends and other factors that have a
bearing on prices. When, however, people start speculating recklessly
and blindly without applying their mind and intelligence, and without
possessing the resources necessary to meet their commitments, it
degenerates into sheer gambling.
Futures Trading
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