Stock Market Glossary
Backwardation
Futures-market situation in which later contracts can trade below near-term contracts.
In brief: Futures-market situation in which later contracts can trade below near-term contracts.
Meaning in practice
Backwardation can arise in commodities when immediate availability is especially valuable or scarcity is expected. Rolling into later contracts can then create a positive roll effect for futures strategies. The effect is not permanent; spot price, storage costs, rates and supply-demand conditions all shape the curve.
Context for investors and traders
For investors, the term becomes practical in the context of objectives, time horizon, risk capacity and costs. A suitable solution can differ between two people even when they consider the same product or metric.
How to use this in practice
The term becomes practical when expressed in numbers: what is the position weight, which costs apply, what loss is possible and what role does it play in the portfolio? These questions prevent an otherwise useful product from becoming too large or being used at the wrong time.
What to keep in mind
Include taxes, spreads, product structure and personal liquidity reserves in comparisons. Historical returns and a fund’s or index’s characteristics describe the past, not a promised future result.