Why do people say they're "buying futures contracts&quo

General discussions about futures.
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fc
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Why do people say they're "buying futures contracts&quo

Post by fc » Fri Jul 13, 2012 5:49 pm

Why do people keep saying that they're "buying futures contracts" when they're just entering into them? It doesn't cost anything to enter them, so they're not really buying anything. Yet why is it referred to as buying? Just convention?

The same question I have for selling futures contracts. It seems to me that there is no such thing. You only enter a short position, or exit your existing long position. You're not selling anything.

Maybe I am missing something completely basic? Some comments on this would be appreciated.

sluggo
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Post by sluggo » Fri Jul 13, 2012 7:01 pm

Because that is the exact word your broker requires you to say, when you make a trade
  • To enter into a Long position, you tell your broker to BUY
  • To exit from a Long position, you tell your broker to SELL
  • To enter into a Short position, you tell your broker to SELL
  • To exit from a Short position, you tell your broker to BUY
Richard Waldron wrote a pretty good book called Futures 101, which you can find on Amazon and perhaps at the library, you might enjoy reading it.

fc
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Post by fc » Sat Jul 14, 2012 7:19 pm

sluggo wrote:Because that is the exact word your broker requires you to say, when you make a trade
  • To enter into a Long position, you tell your broker to BUY
  • To exit from a Long position, you tell your broker to SELL
  • To enter into a Short position, you tell your broker to SELL
  • To exit from a Short position, you tell your broker to BUY
Richard Waldron wrote a pretty good book called Futures 101, which you can find on Amazon and perhaps at the library, you might enjoy reading it.
Thanks for your reply. However, I find that the fundamental question still remains, and can now, in light of your comments, be rephrased like this:

Why did brokers start requiring their clients to refer to entering into a long position or exiting a short position as BUYING, and exiting a long position or entering a short position as SELLING?

This terminology just feels rather strange to me, since, again, nothing is actually being bought or sold.

rhc
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Re: Why do people say they're "buying futures contracts

Post by rhc » Sun Jul 15, 2012 8:02 am

fc wrote:Why do people keep saying that they're "buying futures contracts" when they're just entering into them? It doesn't cost anything to enter them, so they're not really buying anything.
Au contraire, fc, you are buying something & it does cast you something.
You are buying the control of 5000 bushells of Soybeans (or 40,000lb of pig meat or 100oz of fine gold or 42,000 gallons of crude oil etc) which you can take delivery of, during the delivery month, if you so desire.
When you buy your 5000Bu (or whatever) you are putting up a cash deposit that might be 1/10th of the price of the contract. . . .aka margin.
This is money that leaves your pocket, hence it is a cost to you.
See the links below:

http://commodities.about.com/od/underst ... margin.htm
and
http://en.wikipedia.org/wiki/Futures_contract

If you choose not to take delivery of the 5000Bu you are controlling then you can sell your futures contract prior to delivery and you will recive your deposit back less adjustments for any profits/losses that have occured during the time that you held the contract.

rhc
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Re: Why do people say they're "buying futures contracts

Post by rhc » Sun Jul 15, 2012 8:04 am

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Last edited by rhc on Thu Jul 19, 2012 9:19 am, edited 1 time in total.

rhc
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Post by rhc » Sun Jul 15, 2012 8:20 am

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