Introduction to Commodities and Futures Trading

For many decades, commodities such as Gold and Oil have bounced around without a clearly defined direction but since 2002, the gold and oil prices began notching upwards. Eventually gold prices reached peaks about four times their low prices. Today gold is trading in the range of $791, per ounce and crude oil has jumped to about $95 per barrel. World investors have indeed discovered Commodities and Future trading and its potential as a suitable investment asset. Trading Commodities and Futures requires a Brokerage Trading Account Before the late 1990s, relatively few people had their own brokerage accounts; the mutual fund was the investment of choice for the investing masses and was sufficient to meet most of their needs. Today an exponential growth has occurred in Commodities and Futures trading Exchanges, thanks to advances in technology and the Internet.

How commodity futures work

 Trading commodity futures successfully can take a lot of detailed understanding and experience, but the idea behind commodity futures is extremely simple. For instance if you are a farmer planning your production for next season you may estimate that unless you have a catastrophic growing season, you'll be able to grow 1,000 bushels of corn and harvest it next October. Without commodity futures, you'd have to wait until next year and then try to sell your harvested corn in the cash market.  Such scenario means that you are exposed to the risk that prices may move down sharply over the course of the next 12 months, reducing your potential profit or even turning it into a loss. On the other hand if prices move up, you will do better than you expected, but often-rising prices reflect bad conditions that could affect the quantity of your crop production. If you could lock in a price now but not have to deliver your corn until next year's harvest, you would know exactly what to expect to receive at harvest time and eliminate the risk of falling prices.  

On the other hand, say you're a rancher who uses corn to feed your cattle when necessary. You know that next October, your cattle won't be able to count on summer grasses for grazing, and you'll need to buy 1,000 bushels of corn to make it through the winter. Like the farmer, you could wait to see what the price of corn is next year, but if prices go up, you may not be able to afford the corn. If you could lock in a price this year, you'd know what to expect and eliminate the risk of rising prices.

In addition to agricultural commodities, used in these examples, there are many other Futures and Commodities Asset classes available for trading. There are futures for financial instruments and intangibles such as currencies, bonds and stock market indexes. There are futures trading in many kinds of metals in addition to Gold, Silver, Copper, Aluminum, Platinum, and others. Each futures market has producers and consumers who need to hedge their risk from future price changes.

  Speculators

The speculators are the actual investors, seeking to profit from the investment opportunities arising from price discrepancies between the producers of such commodities and the users. The speculators do not actually deal in the physical commodities; their role is very critical to the smooth functioning of the Commodities Markets through the price liquidity, which they provide. This maintains an orderly market where price changes from one trade to the next are small. In addition to reducing the costs of production, marketing and processing, futures markets provide continuous, accurate, well-publicized price information and continuous liquid markets. Futures trading is beneficial to the public, which ultimately consumes the goods traded in the futures markets. Without the speculator futures markets could not function. If, for instance, you were speculating in corn, you would buy a futures contract if you thought the price would be going up in the future. You would sell a futures contract if you thought the price would go down. For every trade, there is always a buyer and a seller. Neither person has to own any corn to participate. He must only deposit sufficient capital with a brokerage firm to insure that he will be able to pay the losses if his trades lose money.

Trading successfully requires knowledge and analysis. Many Futures and Commodities traders use research to identify emerging future price trends upon which their trading decisions are made. One of the wealthiest investors in the World Warren Buffet made billions in profits trading Currencies. But as with all investments potential for losses are also present. Your first step in trading Commodities and Futures is to open a Commodities Brokerage Account with Commodity Brokers. Such companies have minimum investment requirements, and are regulated by government agencies. In the US, the Commodities and Futures Trading Commission {CFTC} regulates the Futures and Commodities Markets