WHAT ARE HEDGERS AND SPECULATORS?

Not everyone in a Futures market wishes to take physical delivery of a contract and this has given rise to speculators. Speculators trade purely for money profits by correctly forecasting market movements. They assume their own risk and provide the liquidity to the market which in turn has provided traders with greater opportunities to make money.

Hedgers, on the other hand, use futures to protect a sale or purchase price in the underlying market, by either selling (go short) to lock in a price and obtain protection from declining prices or buy (go long) to lock in a price to obtain protection from rising prices, with the ultimate aim of reducing price risk. Hedgers are not normally interested in where the market goes as long as they are correctly hedged and will therefore avoid risk. Hedgers tend to be big institutional firms or producers known in the market as paper.