Commodities have a reputation as being a risky investment. However, if you manage your risk and trade intelligently, you will do fine and can make a substantial return on your investment. As trading in commodities is a risky affair, managing the risk may involve some form of speculation, this is the reason why commodity futures trading emerged.
What does trading in commodity futures entail?
Commodity futures trading involve basically speculation on price. As a trader, you may predict a future fall or rise in the price of your particular commodity basing on the market trend. As a result, you may choose to trade in a specific direction by either going long or going short. Buying the commodity futures contract means “going long” while selling it means “going short”. If you think the price of your chosen commodity will rise between now and the delivery date you may want to buy (go long) and then sell the contract back after the price goes up. If you feel the price will be going down you would sell now (go short) and then buy back later at the lower price.
Despite the substantial amount of risk involved, this market can also be both volatile and fast-moving. Nevertheless, there are big profits to be made by those successful in commodities futures trading. One reason for this is because traders are able to get huge leverage in making trades, enabling them to control large amounts of commodities for relatively small amounts of cash.
Since you are trading on the future of something, everything is done on paper. This means you do not have to worry about when and how to make the transaction. You also do not have to worry about where and how to store the actual commodity because it does not belong to you yet. When you trade futures, the market is considered to be very liquid. This is because of the large volume of contracts that are traded each day on the market. If you want to buy or sell in the market, you can usually do this very quickly.
One of the other really big benefits of trading on the futures market is the time that it can take you before you can turn a profit. The traditional stock market can take several years before you see any real return on the money that you invested in it. When you trade in the commodity futures market, if you get a hit on your first trade, you can make an immediate and substantial profit in just your first few months.
Types of commodities are involved in commodity futures market
Commodities futures trading started only with a few commodities, majorly the agricultural produce. The commodities that were dealt with were actual physical products like grains, cocoa, coffee and sugar. This assisted farmers who were being exploited by dealers to find an alternative way of selling and pricing their harvests. Notably, the farmers were at the mercy of the unscrupulous dealers when it comes to pricing and selling their farm produce before the commodity futures market that allowed farmers to commit their future harvest to interested dealers evolved. This significantly ensured that their grains supply was maintained in the future.
The futures commodity market eventually evolved to deal with metals (precious and non-precious) such as platinum, silver and gold, financial instruments like T-bills and T-bonds, and interest rate bearing instruments such as currencies and stocks. These items constantly fluctuate in value and the current ‘spot price’ is a quote relating to the value of the commodity right now. These quotes change continually as the values change. Also, there are futures trading markets for cattle and livestock and for oil and energy generating products such as natural gas and crude oil. Not forgetting futures trading in commodities such as orange juice, coffee (the different types), industrial materials such as cotton and lumber.
Today, technological innovations have advanced commodity futures trading allowing it to be carried on online. This has resulted in scrumptious benefits with more trading options for investors. It only requires a trader to have a computer and internet and can be able to access the commodity futures market at any part of the world. Through the internet, you can see the most recent information from different parts of the world with the comfort of the place where you belong and that is what online futures trading can offer you. The commodities traded in online futures markets include commodity futures based on agricultural commodities, energy, equity indexes, interest rates, real estate, foreign exchange, metals and weather.
How to invest in commodity futures market
As we can see, investing in commodity futures trading presents everyone with a good opportunity to make a profit. Many people, however, perceive future markets as highly risky and consequently they fear to participate in this market. Nonetheless, it is good to acknowledge that every business has risks involved and the benefits that drive every investment. Keeping in mind that any kind of investing is a gamble, you must take prudent and knowledgeable steps before investing in futures market just like in any other market.
Whether you are investing your money in the stock market, the futures market or even your friend’s new business there is always the potential that you can lose all of your money. Before you invest you money in anything, you should spend some time getting educated. Yes, it is now easy to make trades online, but you are running a risk if you do not do some serious homework first. Another rule of thumb you should keep in mind when you are investing is to never invest any money that you cannot afford to lose. It can be tough to stick to that, but you will be better off.
The professional services of a commodity trading advisor can be invaluable. Trading advisors have the experience by competing side by side with some of the best traders in the country. Team up with a professional to gain insight on all the complexities involved in the commodity market to help you develop the necessary skill of risk management through discipline and capital preservation expertise. With the rapid changes in market conditions and technology advances, you can never be too prepared for competitive commodity trading.