Grassroots History of the Futures Contract

New and aspiring day traders often ask the question, “what are Futures”?

The best way to answer this common question is to take a little step back in history.

During the grassroots of the monetary exchange, goods were often exchanged or “traded” for payment. However, as time progressed, consumers realized certain products were only needed during specific times through the year.

Additionally, if consumers purchased a year’s supply of said good, it would likely parish long before it was needed or used. Furthermore, if consumers chose to delay their purchase until it was needed, there was a good chance the good would raise in price a la Supply & Demand!

Enter the founding of Futures, which was a solution to an increase in demand calling for more agricultural storage, transportation and efficient distribution. Futures allowed consumers to purchase an asset at present time at an agreed upon price, yet collect at a pre-determined future date. Consumers locked in the present price to “hedge” off any futures price fluctuations.

In addition to helping purchasers secure a price, futures also benefited the sellers by allowing them to limit their price risk by locking in a price for a future sale. Both sides of the monetary exchange benefited from futures contracts and it’s still a vital component of today’s financial infrastructure.