Commodity Trading

Commodity futures trading is an often-overlooked investment arena. There are a number of reasons for this. First of all, it’s simply not an investment that’s publicly touted as widely as stock trading and other more common investments. Commodity futures trading is different from stock trading, so it does require traders to learn how to handle investments in a different type of market. Also, many investors have been scared away from commodity trading by horror stories from investors who lost huge sums in the commodity markets. The truth is that while commodity trading is a higher risk
venture than conservative fixed-income investments or traditional stock trading, it is nonetheless a market in which it is possible to generate high returns that more than justify the additional risk.

Understanding Future Contracts

Commodity futures are traded in the form of contracts of a standardized size (for example, 5,000 bushels of wheat) that expire in different months. This is obviously different from stock shares that have no expiration date and can be held indefinitely. Futures for a given commodity can usually be traded as far ahead in time as two to three years, however, the vast majority of trading nearly
always occurs in the contract with the closest expiration date, known as the “front month”.

Futures prices are more subject to sudden, volatile price changes than stocks typically are. A stock that has a long history of steady price appreciation or dividend payouts is likely to continue that trend. But with commodity futures, a downtrend in price can change to an uptrend literally overnight due to factors such as an unexpected freeze or drought during growing season.

Futures contracts are divided into five main categories:

• Agricultural futures, such as corn, wheat, orange juice, and cocoa
• Livestock futures, such as lean hogs and live cattle
• Energy futures, such as oil, heating oil, and natural gas
• Metals futures, such as gold, silver, and copper
• Financial futures, such as Treasury bonds, stock indexes, and
• currencies

Thanking You

Subham Modi