So here is my first question of the year....Do you care if the markets go down this year? You shouldn't! Do I hear a gasp? I hope not. If you gasped then we haven't done our job well enough. When the market goes down, you should still be able to make plenty of money. But just in case you still don't understand that concept, here is a little information about a tool you can use, called Futures. Let's start this year off with the basics.

A futures contract is a legally enforceable agreement to make delivery or to take delivery of a specific quantity and grade of a particular commodity during a designated delivery period. Almost 97% of all futures positions are liquidated before delivery takes place. This means you don't have to take delivery of a bunch of Corn, Gold or Oil if you don't want them on your doorstep. You can simply liquidate your position. We liquidate our positions every day by selling what we bought or buying back what we sold.

The most unique and important characteristic of Futu res is that it offers you, the investor, the flexibility of capitalizing on ANY market condition. All investments allow you to buy the product first, but Futures is an investment tool that makes it easy to sell first without owning and buy back lower at a later time. Futures provide you great control during strong or weak economic times. (Selling first, without owning is sometimes a confusing concept, but let us explain).

In the beginning goods were "traded" or exchanged for payment. As time progressed futures were developed in answer to growing productivity calling for more agricultural storage, transportation and more efficient distribution. Purchasers of goods began to realize there were certain items they needed throughout the year, but didn't always need them right away. If they bought the goods and didn't use them right away the goods would perish. And, if they didn't buy them right away the prices would rise and they would have to pay more. Futures allowed purchasers to enter into a transaction in the present that would enable them to h ave the goods at a later date thus locking in the present prices for a future transaction. Conversely, sellers of goods were not always ready to sell because they were in harvest, but futures allowed them to enter into a transaction that would lock in the current price for a future sale. This allowed them to limit their price risk. We call these purchasers and sellers "hedgers".

Speculators are people that take the opposite sides of these hedged trades. In other words if a hedger needs to buy, the speculator will sell, and vice versa. Speculators are critical to hedgers as they take on the risk of market fluctuation and thus provide liquidity to a market. Liquidity allows everyone to enter and exit the markets with ease. In other words, the market flows and provides opportunities to buy and sell at every price. Without liquidity no one can get the price they desire. If a speculator is "long" he/she wants the market to go up (and sell at the higher price).< SPAN style="mso-spacerun: yes"> If a speculator is "short" he/she wants the market to go down (and buy back at a lower price). The speculator has no intention of taking delivery or delivering the goods he/she trades. They are purely taking advantage of price movement.

As time progressed, futures became more widely developed, used by "hedgers" and "speculators" alike. Company stock portfolios needed to be hedged so stock index futures were created. Banks needed to hedge their bonds portfolios so bond futures were created and so on.

So, as you can see, futures are not some awful, scary thing that some crazy people created. They were created for a very important purpose. If you think about it, without futures you would not be able to have cereal. How does a huge company like Kellogg's handle all the purchasing of products needed to make your Froot Loops, Corn Flakes or SpecialK? You don't think they buy all the flour and wheat all at once? No, but they do know that they are going to need those ingredients over and over. So, when you are talking to friends about futures (as you often do) and someone says, "Oh th at stuff is for the sharks", think again. Ask them what they ate for breakfast.

For more RDS articles on trading, visit www.rdstrader.com.