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FUTURES AND FORWARDS

Futures, like options, are a two-party contract. Many futures contracts are an agreement for the delivery of a specific amount of a commodity at a specific place and time. Futures were first traded for commodities such as wheat and gold, and over the years they have expanded to include financial futures, such as on Treasury securities, and, most recently, single stock futures. The specific terms and conditions of the contracts are standardized and set by the exchanges on which they trade. The contract amount, delivery date, and type of settlement vary between the different futures contracts. Most investors will use futures as a hedge or to speculate on the value of the underlying commodity or instrument. Forwards are privately negotiated contracts for the purchase and sale of a commodity or financial instrument. Forwards are often used in the currency markets by corporations and banks doing business internationally. If a corporation knows that it needs to make a payment for a purchase in foreign currency three months from now, the corporation can arrange to purchase the currency from a bank the day before the payment is due. The big drawback with forwards is that there is no secondary market for the contracts.

SECONDARY MARKET ORDERS

Investors who do not purchase their stocks and bonds directly from the issuer must purchase them from another investor. Investor-to-investor transactions are known as secondary market transactions. In a secondary market transaction, the selling security owner receives the proceeds from the sale. Secondary market transactions may take place on a centralized exchange or in the OTC market known as Nasdaq. Although both facilitate the trading of securities, they operate in a very different manner. We will begin by looking at the types of orders that an investor may enter and the reasons for entering the various types of orders. Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor's order will be executed immediately. Other types of orders may state a specific price or condition under which the investor wants an order to be executed. All orders are considered day orders unless otherwise specified. All day orders will be canceled at the end of the trading day if they are not executed. An investor may also specify that an order remain active until canceled. This type of order is known as good til cancel, or GTC.

 
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