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Commodities – How to Trade Futures Contracts
By Tony J Lorenzo
More and more individuals want to learn how to invest in commodities but one must understand that these investments are highly leveraged. In order for an investor to own a futures contract, only a small fraction of the value of the contract is needed to invest in it. If the investor correctly forecasts the price movement of the commodity traded, the investor has a great chance of profiting ten-fold for an initial investment of ten percent of the actual futures contracts value. That is how leverage works to the advantage of the investor in commodity trading. Of course leverage can work against the investor if he predicts wrong.
In this article we will cover the basics of how to trade commodities.
What Are Commodities?
Commodities are the essential things that people make use of everyday and are the basic essentials needed by a modern society.
What Are The Different Types Of Commodities?
Some of the most popular that are being traded are:
1. Currency trading
This involves the process of buying and selling in the foreign exchange market. Some of the well-known currencies that are being traded for this purpose include the British Pound, Japanese Yen and the US Dollar.
2. Grains
There are many crops and produce that this section provides. Aside from wheat, the popular ones that are being traded in the markets
include corn futures and soybeans.
3. Energy Futures
These contracts deal with the likes of gas and oil futures and covers anything that fuels and lights up peoples lives.
4. Interest Rates
This type not only deals with interest rates but also with bonds and other kinds of financial transactions.
5. Foods
The well-known in this arena are those commodities that have value and are popular to many such as sugar, coffee as well as orange juice.
6. Metals
The most common materials being traded for this sector include the kinds of metals like copper, silver and gold.
There are other commodities being traded such as lumber and cotton, but some of them are very thinly traded and therefore not liquid enough for a beginner to easily enter and exit a trade which produces a greater risk of loss.
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What Are Futures?
A future contract is an agreement between a producer and a buyer for a future delivery of a certain amount of produce at a certain price. The futures contract evolved when farmers of grains began setting up agreements with interested buyers for future harvests that would usually involve a certain amount of cash as a guarantee of the contract.
What Is Commodity Trading?
Commodity trading is speculating on the future price of a commodity.
There are times that the buyer of the futures contract may have a change of mind and decide not to take delivery of the produce. He would
then find a buyer who would be interested and offer the futures contract at a certain price. There are also times that a farmer may decide not to deliver on the contract and would then pass on the obligation to deliver to another interested farmer. The transfer and trade of these contracts became known as commodity trading.
Many people have discovered that trading the contracts became a good way to make money. Soon, there were people who began to buy and sell the futures contract without intending to take the delivery for themselves. All they wanted was to profit from the price changes that the futures contracts go through. These people are called speculators who try to profit by buying the futures contracts low and selling them high.
These days, transactions usually happen in places called futures exchanges. They may operate much like the stock exchange. Only this time, it is the commodities that are being traded instead of stocks.
Just like any other type of investment, commodity trading also has its own advantages and disadvantages. It would be wise for an investor to first
learn about the ins and outs of futures trading before venturing out into the opportunities that it may provide.
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