Daily Trading Limit : The maximum gain or loss on a commodities futures contract that is allowed in any one trading session. The exchange sets these limits to protect investors from extreme volatility.
Deferred (Delivery) Month : The more distant month or months in which futures trading is taking place. For example, in a five-month futures contract, the months four and five are deferred months. It is the opposite of nearby (delivery) month.
Day Traders : They are speculators who take positions in futures and liquidate them on the same trading day. Their strategy is to profit from intraday movements in the price of a commodity. A day trader closes all trades before market close. He does not hold any open positions overnight.
Deliverable Grades : They specify the quality of a commodity that is to be delivered under a particular contract. For example, oil comes in many different qualities. And each grade of quality has a different price. Deliverable grades ensure that the buyer and seller agree upon the quality of a commodity. They are also referred to as contract grades.
Delivery : Delivery is the action by which a commodity is physically transferred to the buyer under a contract. Each futures exchange has specific procedures for delivery of a commodity. Delivery can occur in spot, option, or forward contracts. But many times a contract is closed out before settlement. In this case no delivery occurs.
Delivery Month : A specific month in which delivery of a commodity may take place under the terms of a futures contract. It is also referred to as contract month.
Equilibrium Price : The market price at which the quantity supplied of a commodity equals the quantity demanded.
Expiration Date : Each futures contract is active for a specific amount of time during which it can be traded. The date on which a futures contract stops trading is its expiration date. The date is fixed by the futures exchange. The expiration date represents the day when physical goods are actually delivered for cash.
Full Carrying Charge Market : It is a futures market where contracts with a later maturity have higher future prices compared to current spot prices. These prices are higher because they take into account the cost of storing a commodity.
Fundamental Analysis : A method of anticipating future price movement using supply and demand information.
Futures Contract : A legally binding agreement to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. The only variable is price, which is determined on an exchange-trading floor.
Futures Exchange : It is a central marketplace with established rules and regulations. Here buyers and sellers meet to trade futures and options on futures contracts.
Hedger : A hedger owns or plans to own a physical commodity such as gold or soya beans. But he is concerned that the cost of the commodity may change. He, therefore, achieves protection against changing cash prices by purchasing a futures contract of the same commodity.
Hedging : Hedging is done in order to protect against the risk of price changes of a commodity in the future. A hedger owns or plans to own a physical commodity. In order to hedge, he also takes a position in the commodity in the futures market. Hedgers use the futures markets to protect their businesses from adverse price changes.
High : The highest price of the day for a particular futures contract.
Initial Margin : The amount a futures market participant must deposit into his margin account at the time he places an order to buy (sell) a futures contract.
Inverted Market : A futures market in which the more distant the contract month, the lower is the futures price.
Liquidate : Liquidate means to convert assets into cash or equivalents by selling them on the open market.
Long position : A position where the investor buys futures contracts or owns a cash commodity.
Long Hedge : Buying a futures contract to protect against a possible price increase in a commodity that will be bought in the future. It benefits a company that knows it has to buy a certain commodity in the future and wants to lock in the purchase price.
Low : The lowest price of the day for a particular futures contract.
Maintenance Margin : A set minimum margin that a customer must maintain in his margin account.
Margin Call : A call from a clearing house to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.
Market Order : It is the order to buy or sell an investment immediately at the best available current price. An investor makes the order through a broker or brokerage service.
Marking-to-Market : To debit or credit on a daily basis a margin account based on the close of that day's trading session. In this way, buyers and sellers are protected against the possibility of contract default.