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A Guide to Understanding Opportunities and Risks in Futures Trading

from The National Futures Association

The Process of Price Discovery

Futures prices increase or decrease largely because of the myriad factors that influence buyers� and sellers� expectations about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).

As new supply and demand developments occur and as more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward. This process of reassessment of price discovery is continuous.

On any given day the price of a July futures contract will reflect the consensus of buyers� and sellers� current opinions about what the value of the commodity will be when the contract expires in July. As new or more accurate information becomes available or as expectations change, the July futures price may increase or decrease.

Competitive price discovery is a major economic function � and, indeed, a major economic benefit � of futures trading. Through this competition all available information about the future value of a commodity is continuously translated into the language of price, providing a dynamic barometer of supply and demand. Price "transparency" assures that everyone has access to the same information at the same time.

Next chapter: Gains and Losses on Futures Contracts

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