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Futures Exchange Explained: Understanding What an Exchange Is and How It Works

ByDave Stopher

Sep 29, 2019 #Business

Certain trade terms are confusing when you’re new to commodity trading including futures contracts, options contracts, etc. Sometimes you’ll overhear traders chat about futures exchange – all these terms can throw you off. And unless you understand what they mean, trading will remain a foreign animal.

As a futures investor, you need a clear understanding of what you’re getting into. This is how trading commodities will make sense to you. Or become financially beneficial over time.

To make things clearer, futures contracts is just that: a contract. It’s an agreement to buy or sell a commodity at a future date and at a price, you and the buyer agree upon. Maybe you’ve come across people trading commodities on TV including oil, fruit juice, meat – all these are future contracts.

Trading futures contracts is easy through a registered member/broker firm

But a futures exchange is a different cup of tea. It’s a marketplace where, as a trader, you buy and sell the said commodities. And not everyone is allowed in the marketplace only members (read: brokers and commercial traders) registered to trade futures contracts.

If you want to trade futures you can go through a registered member/broker firm to achieve your goal. Or have an account with the futures exchange to make trading easy. Where to register to become a member? CFTC, Commodity Futures Trading Commission or NFA, National Futures Association.

The good thing about exchanges is, it eases trading of commodities. Also, you spend less time looking for a trader to trade with. In other words, you can get in quickly, find a trader, and start trading right away in a safe environment. It’s this safe aura that makes trading at an exchange ideal for everyone.

How does a futures exchange work?

Since it’s a marketplace that brings traders together – and makes trading safe, it heavily relies on the trading volumes and the dollar’s value traded when commodities are sold and bought. So the more the traders the better for them, and it makes sense.

In fact, an exchange works day and night to bring in more traders, and make them trade as much as possible. Increased participation in trading is what makes them money. High participation has instigated a proliferation of exchanges in recent time thanks to the inception of the Internet.

Exchanges once used to have physical locations, and they were popular with traders. An in-thing that created a trading fad. But things have since changed with the rise of electronic networks. Trading now happens from any location provided you have a computer and reliable Internet connection.

Then again, online trading nearly happens 24 hours a day, 7 days a week. There’s no stopping. Trading is fast. And decentralized as well. That means you can get connected to an exchange-member or broker firm in any part of the world and start trading – at a click of a button.

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