Commodity Trading

If you talk to your financial advisor about whether or not you should become a trader in the commodity market, chances are that they will steer you away from this idea and instead recommend that you maybe put your money into stocks or bonds in order to achieve decent growth. Is this because you cannot achieve decent growth on your money by buying commodities? No, rather this is because of the inherent risk and volatility when trading in the commodity market, as well as the fact that smaller investors do not have as much direct access to commodities as they do to stocks and bonds.

However if you have decided that you would like to commit at least some of your money to the commodity market, the vehicle that most people would be familiar with is a futures contract. This type of commodity trading is called direct exposure, and it is risky because most futures contracts are traded on margin as well as the fact that betting on any one single commodity can be risky due to the volatile nature of how rapid price changes can occur.

Minimizing Risk With Indirect Commodity Exposure

While there is nothing inherently wrong with trading commodity futures contracts, and indeed if you really know what you are doing you can reap great rewards from trading on margin in this fashion, for a large percentage of people they are looking for a way to get consistent returns without the risk of losing their initial investment. The answer to this is to enter into the commodity market with indirect exposure using mutual funds, which can be a smarter and safer way to access the gains associated with these markets while minimizing as much risk as possible.

There are dozens of mutual funds that buy and sell futures contracts linked to individual commodities, and very often these funds will trade across a basket of different related commodities which is much safer than trading a single individual commodity. Putting your money into these funds instead of directly into the futures contract can help to give you consistent growth without any sharp decline in value. Another even more indirect way to trade is to find the mutual funds that buy and sell the shares of different companies that are directly involved with the production of certain commodities. While this is the least risky approach, it is also true that you will not benefit from the full upswing in value if the market moves favorably in your direction.

Gold, Silver and Precious Metals: Betting Against The Economy

Gold and other precious metals are unique commodities because they fly in the face of traditional logic when it comes to deciding which commodities to buy. If you consider the example of corn, timber, or steel, you would buy each of these commodities when the economy is in full gear and all of these commodities are being used heavily, so the price will stay high or go higher. However gold and silver are the commodities you would buy when you think that the economy is going to slow down, because these are where there are the biggest price increases during economic downturn, which means that when you purchase these commodities you are literally betting against the economy.

Author: Ricky Weber
Article Source: EzineArticles.com
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When you think about commodity investing, you become afraid of trading commodity futures. But how about commodity mutual funds and commodity ETFs. Now for people who have never invested before, commodity mutual funds are the safest bet as they are the least risky. But if you want to make high returns than you should be ready to take on more risk!

First why invest in commodities? Did you come across this breaking news that gold explodes to new all time record high. Gold stocks are up by 8% despite a bear market. Do you know that gold prices have been on the rise for the last one decade and have now crossed the $1000 per ounce barrier. Similarly, crude oil prices are also expected to jump up to $200 per barrel as the global economy recovers from the recession.

What we are witnessing is the start of a secular bull market in commodities. Some say it had already started a few years back. Well, in any case this secular bull market is supposed to last for a few decades. The best way to profit from commodities is to invest in a good commodity ETF.

Now, ETFs gives you the benefit of diversification just like a mutual fund but they have lower fees something like 0.7% as compared to 2-4% of the mutual funds. Another additional benefit is that ETF shares can be traded just like stocks. You can go both long or short on the shares of ETF anytime you want unlike mutual fund shares that can only be traded after hours.

So ETFs provide you with the benefit of both diversification as well as liquidity. Commodity ETFs invest in a basket of commodities through the derivative securities based on commodities. Take the example of commodity ETF launched by Deutsche Bank in 2006. Now this commodity ETF mimics a commodity index based on a basket of six commodities: light sweet crude oil, heating oil, gold, aluminum, corn and wheat.

This commodity ETF invest directly in commodity futures contracts that are rolled over every month which can make this commodity ETF volatile. You can find now many good commodity ETFs in the market that track individual commodities like gold, silver or crude oil.

Author: Ahmad A Hassam
Article Source: EzineArticles.com
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As commodities have been growing in popularity among savvy investors, they offer fertile territory for a financial copywriter looking to expand his clientele. So here is a basic introduction to this lucrative niche.

Even though many individual investors haven’t been directly introduced to the concept of commodities, they are often included in mutual fund investments incorporated in their investment portfolios.

Commodities refer to tangible goods such as crude oil, soybeans, gold, platinum and corn. These tangible commodities are exchanged internationally on virtually every stock exchange as every global marketplace relies upon these goods for manufacturing and trade. Commodities can be traded as a future or on a spot trade basis. Spot trade refer to commodities which are settled immediately, or on the spot, rather than at a future point in time (futures).

To write about commodities, a financial copywriter must understand Futures Contracts

To help investors understand commodities, the financial copywriter must be able to communicate the concept of “futures.” Futures refer to contracts to buy or sell a commodity in the future, for a specified price and for a specified quantity. A futures contract refers to an arrangement between a buyer and seller for a specific commodity.

Futures contracts executed between buyers and sellers consist of the following information:

o Which commodity is being purchased or sold
o The date the commodity will change hands
o The quantity of the commodity changing hands
o The price agreed upon between the buyer and the seller Who Invests in Commodities?

As previously mentioned, many individual investors are unaware that they participate in the commodities markets as the investments are contained within mutual funds held within their portfolio. A financial copywriter should be aware of several investor types who proactively seek commodities as a portion of their portfolios, primarily to act as hedges against other asset class movements.

The players that the commodities markets attract include:

o Large Speculators- Institutional investors and commercial traders often trade commodities without taking physical possession of the goods. They profit on the price differentials, providing portfolio growth in the form of profit for their respective investors.

o Small Speculators- While large speculators and commercial traders are more common within this marketplace, individual investors can hold commodities within their portfolios by working with a commodities broker.

How to Begin Trading Commodities

Before investing into commodities, evaluate your portfolio’s holdings, your personal investment risk tolerance, your investment time frame and your short term and long term financial goals. Commodities act as one asset class among 22 current options, with each asset class working in relationship with each other. Many investors select commodities as a hedge against other asset class downturns. To begin trading commodities, you will need to establish a relationship with a commodities broker.

Author: Leon Altman
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Everyone knows what a stock index is. It is price weighed or value weighted measure of a basket of stocks. Indexes are very important in the world of investing. If you want to invest in commodities, you should invest in a commodity index.

Just like other indexes, commodity indexes track the performance of a basket of commodities. This basket usually includes wheat, corn, soybeans, coffee, sugar, cocoa, cotton, lean hog, live cattle, feeder cattle, heating oil, gas oil, unleaded gas, crude oil, natural gas, aluminum, copper, lead, nickel. Zinc, gold, silver etc So you can see, these indexes track a variety of commodities.

The most popular commodity index is the Goldman Sachs Commodity Index (GSCI). GSCI tracks the performance of 24 commodity futures contracts. Another popular commodity index is the Reuters/Jefferies Commodity Research Bureau Index (CRB).

Now CRB is an important commodity index and it is widely followed by hedge funds, institutional investors, retail investors and economists as a commodity benchmark. CRB is based on a basket of 19 commodities that have been primarily chosen on the basis of their liquidity and performance in the past. If you are into commodity investing than you need to keep an eye on CRB. Another very important commodity index is the Dow Jones-AIG Commodity Index abbreviated as DG-AIGCI. Now DG-AIGCI places a premium on the liquidity and production of the commodities. This ensures that no commodity dominates DG-AIGCI.

Rogers Commodities Index (RCI) has a grand list of 35 commodities and tracks the most commodities amongst the different commodity indexes. Deutsche Bank Liquidity Commodity Index (DBLCI) is the newest kid. There are many ways to invest in these commodity indexes.

Now how to do commodity investing. Recently there was a news item that the famous George Soros is betting more than $600 million of his hedge fund on gold. Gold is a very important commodity that is expected to skyrocket in the near future. Remember crude oil the way, it had skyrocketed in the summer of 2008. Now, the most direct method is to trade futures contracts based on one of the above commodity indexes. There are futures contracts on some of these indexes that track their performance. So trading these futures contracts can be profitable in times of a commodity boom just like the one that is expected as the global economy recovers from the financial crisis. Then you can also trade futures contracts on individual commodities like gold, silver, crude oil, coffee, copper and stuff like that.

Another method is to invest in commodity mutual funds that track these indexes. One way is to invest with a third party manager that uses commodity indexes as the basis of their investment strategies. Some of these vehicles include mutual funds, commodity pools or Commodity Trading Advisors (CTAs).

Last but not the least, is the great investment opportunity that Commodity ETFs ( Exchange Traded Funds)provides. This is a highly popular alternative that a good investor should not miss. These Commodity ETFs track the performance of a commodity index and provide you with a great opportunity to profit from the boom in the commodity market!

Author: Ahmad A Hassam
Article Source: EzineArticles.com
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Across the world commodity trading activity takes place on a range of modern, regulated commodity exchanges. A wide range of commodities will be traded between end user buyers and producer sellers under the umbrella of standard contract rules and commodity trading regulations.

In effect world commodity exchanges facilitate the buying and selling of raw commodities ranging from crude oil, copper and wheat to platinum and orange juice.

Some commodities such as crude oil and coffee futures have been traded for a considerable long time in mature markets, but now in the early years of the 21st century we are seeing new markets and futures contracts being introduced.

These more exotic commodity classes include carbon in the form of emission permits. With the growing concern about the serious environmental threats from climate change caused by greenhouse gases, a rapidly growing market has developed in emissions permits, a form of activity known as carbon trading.

For the foreseeable future it is likely we will see continual growth of markets which place a price on the environment, with further development in emissions, plastics and perhaps even water.

The basis of commodity trading activity is the buying and selling of futures contracts for a whole range of commodities. While the nickel or cocoa producer will use commodity futures contracts to hedge their future sales, commercial end users will also use these contracts for hedging against sudden spikes in prices.

Yet these two actors in the commodity markets are dwarfed by the high activity levels of speculators or traders who move in and out of the markets trying to make profits.

A futures contract represents a specific type of contract either to buy or sell a specified quantity of a commodity at a price determined by supply and demand at time of contract, at an agreed date in the future.

Across the time zones of the world there are commodity traders active in the markets either using an electronic trading platform or on the floor of an exchange, called open outcry. Over recent years the volume of electronically traded futures contracts has increased significantly, as a number of exchanges have combined to form a super commodity exchange.

Inevitably, with the access afforded by the internet, a combination of an accessible online trading software package and up to date market data, commodity trading has gradually become more available to the retail speculator, who will usually trade with smaller amounts of capital.

Some traders will prefer to focus on a specific area of the commodities markets, while others look more at the price action and do not worry unduly about the fundamentals of supply and demand for raw materials or food.

With the opening up of the emerging market economies such as Brazil, Russia, India and China (or BRIC countries), we are likely to see a continuation of the growth in commodity markets in these nations. For example, Dalian Commodity Exchange in China has ambitious plans to develop beyond its current specialism in agricultural commodities, and move to industrial metals and more.

While in the Middle East, Dubai is a growing financial centre and the Dubai Gold and Commodities Exchange has an interesting product range including WTI light, sweet crude oil, steel, plastics, gold and silver and the Indian Rupee.

While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired.

Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice.

For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance.

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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
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