What is Commodity Trading
Commodity futures markets allow commercial producers and commercial consumers to offset the risk? adverse future price movements in the products they sell or buy.
should be standardized in order to work a futures contract. They must have a standard size and grade, expire on a certain date and have a preset tick size. For example, corn futures trading at the Chicago Board of Trade are for 5000 bushels with a minimum tick size of 1 / 4cent / bushel ($ 12.50 / contract).
A farmer may be a field of corn and in order to have cover in decline against the possibility of corn prices before the harvest he might sell corn futures. He is locked in the current price, if corn prices fall he makes a profit from the futures contracts to offset the loss on the actual corn. On the other hand, can buy a consumer, such as Kellogg corn futures to protect against an increase in the cost of the corn.
In order to facilitate a liquid market so that producers and consumers can freely buy and sell contracts, exchanges speculators. The speculators objective is to make a profit from taking the risk of price fluctuations do not want commercial users. The rewards for speculators can be very large precisely because there is a significant risk of loss.
Advantages of commodity trading
Leverage. Commodity futures operate on margin, meaning that to take a position only a fraction of the total value available should cash in the trading account.
The costs of the Commission. It’s a lot cheaper to buy / sell a futures contract than to buy / sell the underlying instrument. For example, a full size S & P500 contract is currently worth more than $ 250,000 now and can be bought / sold for only $ 20. The cost of buying / selling $ 250,000 could be $ 2,500 +.
Liquidity. The involvement of speculators means that futures contracts are reasonably liquid. But how liquid depends traded on the actual contract. Electronically traded contracts, such as the e-minis tend to be the most liquid whereas the pit traded commodities like corn, orange juice etc are not so readily available to the retail trader and are more expensive to trade in terms of commission and spread.
The ability to go short. Futures contracts can be as easy as they are purchased so that a speculator to profit from falling markets and rising sold. There is no ‘uptick rule’ for example like there is with stocks.
No ‘Time Decay’. Options at the time because the closer they come to the less time there is for the opportunity to come to expire in the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at maturity.
Disadvantages of commodity trading
Leverage. Can be a double-edged sword. Low margin requirements can encourage poor money management, leading to excessive risks. Not only improved its profit, but so are losses!
Speed of trading. Traditionally commodities are pit traded and should contact a speculator trading a broker by telephone to the order who then transmits it to enter the pit sites. Once the transaction is filled the pit trader informs the broker who then then informs his client. This may occur can be taken high some take and the risk of skidding. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange.
You might find a truck of corn on your doorstep! Actually, most futures contracts are not deliverable and are cash-settled at maturity. But some, like corn, are deliverable although you will find plenty of warning and opportunity to close a position before to get the truck turns up.