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Who trades futures? Their are two classes of traders - hedgers and speculators
Futures traders are motivated by one of two mindsets - a desire to protect against losses (hedgers) OR a desire to gamble on a risky investment (speculators).
Hedgers
Hedgers share a common desire to protect against losses. That is, their business is closely connected to a raw commodity, and a future swing in the price of the commodity can result in incredible losses.
Hedgers can belong to one of two subclasses, producers OR users.
- Producers - Common examples are a farmer, miner, or oil driller. They all share a connection to the raw commodity that is subsequently resold to others for use. Producers protect against losses by selling futures contracts
- Users - Typical examples include a bakery, steel mill, or refinery. As implied by the name, users consume the raw commodity in the process of generating other products. Users protect against losses by buying futures contracts
Speculators
Speculators enter futures markets for one reason only - to make money. Speculators have NO direct connection to the raw commodity traded. They typically bet on changes related to things like economic news (GDP surprise), weather (a cold spell destroying a crop), global political events (a war in the middle east), and domestic political events (a new law passed by the government).
The Hedger-Speculator Relationship
Hedgers and speculators form a symbiotic relationship - they each depend on the other for existence and success. Hedgers invest to protect from loss, speculators invest to make profit. Hedgers are minimizing risk, speculators assume massive amounts of risk.
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