Page 104

Let's have a quick explanation on bid and ask prices. A mark of a competitive bidding system is the ability for the buyers to compete among each other (bid) and the sellers to compete among each other (ask). As such, normally the ask price is higher than a bid price. Once a buyer and a seller reach an agreement in price and a contract is traded, that price becomes the contract's last price. It should be noted that in addition to regular traders competing with each other, there is another breed of traders operating directly on the exchange floor known as floor traders. Unlike floor brokers on the exchange floor who make trades on behalf of others, floor traders trade for themselves. They normally provide liquidity (creating volume) in the market by placing bids and asks and making quick trades. Many times the bid and ask prices that you may see in a quote come from floor traders who make a living by taking advantage of the spread (difference) between the ask and bid prices. They buy contracts at bid price and sell them at ask price (or the other way around) and pocket the difference.While the ask/bid spread may not seem a lot, it adds up to a hefty sum when numerous contracts are bought and sold.

Trading (Buying And Selling) Futures

Trading futures contracts is a tricky business, and while many point to the fact that it is no more complex than trading stocks, commodities are still an esoteric concept to average investors, making them too risky for many to get involved in. Moreover, trading futures contracts involves margin, making them more complex than, say, investing in mutual funds. In most cases futures brokers may require that their …