Commodity Trading

One of the most important decisions that an investor will make does not include purchasing an option or future; this decision is choosing a commodity broker. Understanding the dynamics involved in choosing a commodity broker is as much about understanding yourself as it is getting to know the commodity broker. Since commodity trading can be more involved than trading stocks, it is more important to select the right commodity broker than it is to select the right stock broker.

About Commodity Futures and Commodity Brokers

By definition, a commodity market is the location where sellers and buyers are about to conduct business in futures trading. A commodities trading contract is a legally binding agreement that defines an asset, the quantity of that asset to be delivered and the month when it will be delivered. A margin is invested to purchase the contract and the full balance of the contract is only required if the buyer takes delivery. If a commodity contract is purchased, the correct term is to “take delivery” and if a futures contract is sold, it is referred to as “making delivery.”

Commodity future contracts can be written for any type of commodity such as gold, lumber, livestock, currency, and many others. There are several different futures markets that handle specific types of commodities, such as the CME (Chicago Mercantile Exchange), NYBOT (New York Board of Trade), CBOT (Chicago Board of Trade) and others.

Futures exchanges are regulated by strict guidelines, both imposed by the government and internally, and they are require that trading is done “in the pit”, which means that transactions are handled by commodity brokers that are licensed and have paid to be in that position. These commodity brokers serve as the connection between buyers and sellers. Such an important link requires that you select someone that is not only an excellent commodity broker but someone that can identify your investment shortcomings and help to overcome those flaws.

Two Types of Commodity Brokers

There are two types, or levels, of commodity brokers and the level of service they provide is based on the needs of the investor: full service and discount. Each type of commodity broker has advantages and disadvantages that should be considered when making a decision.

Full Service Brokers

This type of commodity broker is usually recommended for new or inexperienced investors, or for those investors who invest in numerous markets. Full service commodity brokers usually provide more information, advice and help to their clients; they often work with investors to create personalized investment strategies. The fees charged by these commodity brokers are generally higher because of the extra level of service they provide. Full service brokers that specialize in trading commodities are also known as Introducing Brokers.

Discount Brokers

This type of commodity broker typically works better for more successful traders. Discount brokers can charge less for the services that they provide since they provide a smaller range of services.

How Do You Find the Right Commodity Broker?

Finding the best commodity broker for you is more a product of knowing your tendencies than anything else. Remember that your ultimate investment philosophy is to make money and your commodity broker’s job is to help you do that. Some of the traits that you should seek in your commodity broker are:

Experience

Chances are if your commodity broker doesn’t have much experience, the results you receive will be spotty at best. You don’t want your commodity broker to learn how to invest at your expense. Not only is experience in general important, but experience in the commodities where you want to trade.

Support

While a commodity broker may tell you about world-class support, what you get after you sign on is what’s important. If you are considering a particular commodity broker, call and ask for an explanation of the difference between bull call spread and a bear put spread; the level of response you get may be a good indication of the support you will receive after you open your commodity account.

Trial Period

Many commodity brokers will give you a free trial to “test drive” their service. Take advantage of this offer and see what happens. Remember that part of sampling something is trying to find out if it is good, no just trying to find out if it’s bad.

Conclusion

Choosing your commodity broker is one of the most important decisions you will make during your investing career. Successful trading can be the result or the victim of a commodity broker decision. Find a reputable broker that meets your needs and compensates for your shortcomings and you are on the road to investment success.

Author: Stephen Bigalow
Article Source: EzineArticles.com
Provided by: Mobile device news

What are Commodities?

Commodities are goods that are in broad demand and are pretty constant and do not differ much in terms of quality. For example, gold is gold whether it’s mined in Africa or Australia.

Because of this standard in quality, these goods become useful tools for investment and trading. When you buy a barrel of crude oil for example, you know what you’re getting and you won’t get short-changed or cheated.

Examples of goods and products that can be traded as commodities include:

* Precious metals such as gold, silver and copper.
* Agricultural products such as rubber, corn, rice and sugar.
* Energy and industrial resources such as crude oil, coal and aluminum.
* Non-traditional “resources”. Entrepreneurial people have started talking about “natural capital” and trading carbon emissions and weather.

Trading Commodities

When people talk about trading commodities, the majority of them are not actually buying one tonne of sugar and then selling it a week later.

Commodities are commonly traded using derivative tools such as futures. Buying a futures contract of an underlying commodity means you are buying the right to buy the commodity at a certain price at a certain future date. In the meantime, the actual price of the commodity goes up and down from day to day. This fluctuation makes the futures contract either go up or down in price depending on which direction the underlying commodity’s price goes.

The Commodity Market

Commodities are traded internationally, and are traded on various exchanges around the world. Examples of these include the Chicago Mercantile Exchange, Australian Securities Exchange and the Tokyo Commodity Exchange. These exchanges act as marketplaces where commodity futures contracts can be traded and exercised.

The prices of commodities rise and fall. Some are cyclical, while others depend on the current economic outlook and political circumstances. For example, the price of agricultural products like corn and rice fluctuates depending on the time of year, and also on the year’s harvest.

On the other hand, commodities such as crude oil are very dependent on economic and political situations. For example, if there’s political instability such as war or government problems in the Middle East (where most of the oil producers are), the price of crude oil would rise. And the price would rise if the economy and industry are strong, and energy consumption is high; and vice versa.

Why trade Commodities?

The cyclical and trending natures of commodities provide investors with the opportunity to trade in commodity futures. Investors are able to earn from trading commodity futures by being able to predict the cycles and profiting during economic and political upheavals.

Commodity futures can also be traded to hedge against the chance that the underlying commodity doesn’t produce expected output in the current cycle. Companies whose business involves those commodities would then hedge against that and earn some money from commodity futures even though their products don’t sell well.

For investors and casual traders, commodity trading represents another method of trading other than shares or currency. The risks and rewards are similar, differentiated by the underlying commodities being traded.

If you are interested in commodity trading, you will need to do some research on the commodity you want to focus on, and analyse how its price varies depending on annual cycles as well and political and economic changes.

For further information on Business Planning, please visit the trading section of Income Resource Club at http://www.incomeresourceclub.com/trading.

Author: Steven T. Ng
Article Source: EzineArticles.com
Provided by: Import duty tariff