Explore the Marketplace

The Wide World of Futures Traders

All kinds of people come to futures exchanges, to buy and sell futures and options contracts. They may work for banks, corporations or governments. They may be livestock ranchers, investment managers, construction planners, farmers or food manufacturers. Really, futures trading involves just about anyone in the world who wants either to manage the risk of fluctuating prices or profit from those fluctuations. But whoever they are, and wherever they came from, these traders are interested in two types of trading: hedging and speculating.

Hedgers and speculators go hand in hand – if you took one away, there simply would be no market. Hedgers transfer risk, and speculators absorb that risk. It takes both types of traders to bring balance to the market and keep trades moving back and forth.

Meet the hedger

The hedger buys futures contracts because he wants to protect himself from price swings in the future. By using futures to lock in a future price for a product, he makes his costs – and his profits – more predictable. In other words, he trades futures to drive risk out of his business.

But that risk doesn’t just disappear into thin air – it gets transferred to the speculator.

Meet the speculator

The speculator accepts price risk in pursuit of profit. Speculators have no interest in owning the product being traded, but they are interested in the contracts for those products. Think of it like investing – buying and selling futures contracts in order to make a profit when prices move in the right direction.

Hedger or Speculator

People who trade futures contracts come to an exchange to hedge and speculate on the future prices of a wide range of products. Outside the exchanges, people hedge and speculate on all sorts of everyday financial matters. To better understand what these practices look like in the real world, take the quiz below.

These were just a few examples of how hedgers and speculators operate in everyday life. And you know what? Any of these hedgers could act as speculators, and vice versa – it just depends on how their needs align with their appetite for risk at any point in time.