Commodity Trading

The contracts are dealt on future exchange. Underlying commodities are sold in future at a fixed price. The trend of futures trade is gaining popularities day by day. However, this trend of trading usually comes under fire by the critics. They believe that this practice of dealing interferes with the normal cause and effect of supply and demand. However, in this competitive market economy, many buyers and sellers are engaged in trading openly.

Futures trading is of two types: commodity futures contract and financial futures contract. Commodity futures contract deals with physical commodities like rice, sugar, wheat, oil, natural gas, gold silver, diamond, etc. Financial futures contract is about paper investment. It deals with treasury notes, mutual fund, bond, etc. So, people should invest in right contract which can liquidate to give maximum revenue. Large numbers of people invest in both the contracts. However, financial contract futures are considers more risky as compared to that of commodity future contract.

Trader should go long and liquidate the contract when the chance of revenue is max. ‘Going long’ means buying a contract. When a contract is sold, it is called as ‘going short’. ‘Going long’ is more conventional than going short. Those who are involved in futures trading is called as future traders. They are in two groups: hedgers and speculators. Hedgers are seller of the in the economic market who are selling sell underlying assets seeing the risk due to price change. Futures trading is highly leveraged.

The risk of loss exists in futures trading. Past performance is not indicative of future results. The trading platforms also provide REAL-TIME quotes on all the markets traded.

Call and Put trading options are two kind of option agreement. Generally, most people confused by these two options. These two options work on same principal but they are quite different. As a perfect broker you should not make such mistake because call and put trading in very important for you.

call and put trading. are very important tools for brokers because these let them to limit the risks of playing the stock market, including with some other financial products such as futures and stocks. The first things you have to consider is that how the market works and then find a suitable trading method. Not only that but also you have to use it effectively. For this you have to understand call and put trading options very carefully. You have to consider what option is? And what is not.

Many people have wrong idea about put trading option and they think put option is trade something in the future. It is not this but a futures contract. You are purchasing a commodity a definite charge in the future. As a manufacturer you are assured that you can purchase the product that you need. One the other hand if you are an investor then you buy with the intension that the charge is going to rise and you can trade in future for benefit. So, put trading option is very impotent

A call trading is the option to buy the fundamental stock at a fixed price by a fixed date (the expiry). The consumer of a call can buy shares at a beat price until expiry. The writer of the call (actually the seller) is with that obligation. If the consumer decides to buy then the call writer is obliged to sell the shares to the buyer at a fixed price.

The actual difference between the call and put trading. is that you are buying nothing but right of selling and buying at a definite price in the future.

You may have confusion at this. Actually is little hard to grasp at first time. Imagine you want to buy a apartment building in the town. You didn’t able to sell your current house but you decide to buy the apartment in this year. So at this time you decide to make a conversation with the apartment owner and offer him the price of the apartment house with 20% on the top of that. You promise that you will pay in the next year and give him a deposit.

In this case you are purchasing an option and it is call trading option. You can purchase or not after a certain time period. One the other hand the owner is obliged to sell the house at the fixed price.

The heritage of trading futures dates back again to the 1840s in Chicago when commercial dealings among farmers started to consider off. With that stated, the heritage is a complete diverse topic so that is about all this write-up will touch when it arrives to that. Nonetheless, a definition of futures trading is even now essential to obtain great realizing of how it operates and how much you stand to gain from employing it.

Trading futures pertains to a contractual agreement to buy or market a distinct commodity – which could be agriculture, outfits, technology, etc associated commodities – or economic instruments (this kind of as stocks, stock possibilities, currencies, and the likes) at a pre-determined value in the upcoming. It frequently demands the parties undertaking what is termed “futures contracts” which information the top quality and quantity of the underlying asset.

Relating to Investopedia, the conditions “futures contract” and “futures” refer to fundamentally the identical point. This indicates, if you ever hear an individual say they purchased some “agriculture futures”, what they are declaring is the identical as declaring they acquired into some “agriculture futures contract”.

The general contract in the expense earth is that trading futures is a significant economic concept; meaning the futures current market is a key fiscal hub, as it provides a floor for extreme competitors among buyers and sellers and, a lot more importantly, delivering a centre to handle value hazards.

Like nearly each other monetary dealings, the futures industry is extremely dangerous, liquid (i.e. modifications in supply or need have a smaller result on cost), and intricate by dynamics, but it can be understood very easily if you are keen sufficient to understand.

With that stated, irrespective of how liquid, high risk, or complicated the futures industry may well be you can even now advantage significantly from it. For this to come about, you can either: do it yourself as an investor if you are positive of what you are performing; or open a managed account, equivalent to an equity account – where your broker would have the power to trade on your behalf, following disorders agreed upon when the accounts was opened; or, final but not the least, join a commodity pool which like a mutual fund is a group of commodities which can be invested in. The commodity swimming pool presents a very much reduced risk for investors like you – specially if you are unsure how trading futures operate.

Examine a lot more on Trading Futures by clicking the hyperlink.

The general understanding about the commodity trading futures market is that it is a very complex and difficult to analyze market. However on the other hand it is not so! Infact there are a few basic facts that people need to know of which will change their perception about what the commodity trading futures market is and how they work.

The basic knowledge is that the commodity trading futures market or the exchange market as it is known is a public marketplace where the sale or purchase of commodities takes place. These sales and purchases are done at an agreed price so that commodities are delivered at a specified date. The broker is a person who needs to do the purchase or sales of the commodities. The broker is also a part of the organized exchange and the deal is completed according to the terms and conditions as given in the standardized futures contract.

The main thing that distinguishes the futures commodity trading market and a commodity market where commodities are bought and sold is that the futures market works with the help of contract agreements that follow a standard procedure. These agreements are responsible for delivery of a particular commodity at an amount as specified for a future month. It does not include the immediate transfer of commodities ownership.

In short the buying and selling in the commodity trading futures market does not need the buyer or the seller to be the owner of the particular commodity that they are trading for. With futures the main concern is receiving the delivery or making the delivery of the commodity, however the futures should not be bought or sold during the month of delivery. The previous sale also can be cancelled at any time with respect to the equal offsetting sale. If the sale is cancelled before the commodities delivery month then the trade cancels out completely. In this case the commodity is not received by the buyer or delivered by the seller.

In reality there is only a very small percentage very specifically less than 2% of the total of all futures commodity trading contracts that are settled or entered into through the deliveries. A larger part shows that there is a lot of cancellation of deliveries of commodities even before the delivery month in the manner that is described above.

This forms the basic mechanics or the functioning of the commodity trading futures market.

Many of the more common commodity trading strategies actually serve two purposes. The turn of a profit is but one. A hedge is the other purpose. Hedging is a method of minimizing risks by attempting to purchase some form of insurance. As well as minimizing risks, it also usually caps potential profits. One of the strategies to accomplish this is known as the spread.

The majority of the commodities trades do not involve trading the commodity directly, but more in buying or selling a futures contract. “Going long” and “going short” are two of the most basic strategies

To go long means to purchase a futures contract while anticipating that the price will rise before the contract expires. Futures contracts are very similar to stocks or options because vary rarely do the traders or specialists have any actual contact or participation with trading the commodity itself.

Conversely, to go short means to sell the contract while anticipating that the price will drop before the contract expires. Many novices are often perplexed by this strategy. The have trouble wrapping their mind around the concept that the contract is sold by the trader before they even own it.

While the notion may be confusing, the practice is quite simple. While the technicalities remain unseen by the traders, the inner workings are rather simple. The contract is borrowed and the one is bought to make of the shortfall later.

An illustration of this concept is as follows: Trader X sells a futures contract in May for September wheat for $6.00 per bushel. The contract will be written for a minimum amount, which is typically around 5,000 bushels. The price falls in August to $5.40 per bushel. This will yield a profit of 60 cents on each bushel, which equals $3,000, excluding commission. The profits and losses for these ventures are settled daily for trading accounts and the broker balances the books by buying a contract of the same type on the trader’s behalf with the trader’s money.

Effective trading strategies are a combination or different types and lengths of contracts. Throwing in some form of spread is one of the simplest. There are a number of varieties that can be executed, but a simpler approach is sometimes the best move.

An example of this more simple approach is illustrated in this hypothetical situation. In May, the price for a July wheat contract is $5.90 per bushel and for a September contract the price is $6.00 per bushel. By predicting the spread between these two and by anticipating changes before July to greater than 10 cents – and to be correct in that prediction could yield a profit by selling the July and purchasing the September. By shorting July and going long in September, you do profit.

This profit is incurred by watching carefully the behavior of the contracts and acting accordingly. In June, the July contract may have risen to $6.00 per bushel and the September to $6.25 per bushel. By liquidating both positions, in other words, settling both contracts, this results in a 10 cent loss on the July contract, but a gain of 25 cents on the September contract. This means a 15 cent profit per bushel. A small commission will be incurred on the turn around, but it is minute. On a contract that covers 5,000 bushels, this means a net gain of $750.

While a larger gain would have resulted had July not been shorted, but all trading carries risks and it is impossible to predict the future, especially in the stock market, with any degree of certainly. Hence, the term, speculation is used to refer to these activities.

There is an element of rationale for betting against yourself by shorting and by going long at once allows the trader to hedge their best on whichever direction they expect the market to take. Utilization of this spread strategy as well as with many other variations does succeed in capping the potential for profit. However, it does work to minimize downside losses as well.

The two must know concepts for commodities trading are contango and backwardation.

Contango is normal for most commodities. This is because most commodities have a cost of carry. Such costs include warehousing fees financing cost, and interest forgone on money tied up, less income from leasing out the commodity if possible.

The contango should not exceed the cost of carry or else arbitrageurs will take advantage of the situation. Say the spot price plus storage is lower than the futures contract price, arbitrageurs can buy the physical and store it, at the same time sell the futures contract. At the delivery date of the contract, the arbitrageurs can deliver the physical to the exchange for a risk-free profit.

If there is a near-term shortage, the price comparison breaks down and contango may be reduced or perhaps even reverse altogether into a state called backwardation. In that state, near prices become higher than far (i.e., future) prices because consumers prefer to have the product sooner rather than later (see convenience yield), and because there are few holders who can make an arbitrage profit by selling the spot and buying back the future.

A market that is steeply backwardated — i.e., one where there is a very steep premium for material available for immediate delivery — often indicates a perception of a current shortage in the underlying commodity. By the same token, a market that is deeply in contango may indicate a perception of a current supply surplus in the commodity.

So why is contango and backwardation important concepts in commodities trading?

1st) It tells the trader if there is tightness or shortage in the physical market. If the market is rather tight, backwardation spread will be widening OR contango spread will be narrowing. Traders must be careful if they decide to short a product that is in shortage, because shortage situation of the product usually resulting in the price going up.

2nd) Commodities futures contracts have expiration date. Traders need to know in the event that the contract expires and a rollover is required, do the traders earn or lose contango spread as a result.

For a contango product, say gold, near term price is lower than far month price; so if the trader has a long position in gold that is expiring, he will lose contango spread when he rollover his current contract to the next month.

On the other hand, if the trader has a short position on gold that is expiring, he will gain contango spread when he rollover his current current to the next month.

Gold contract is an example of a contango product: Near term price is lower than far month price. And copper contract is an example of a backwardation product:
Near term price is higher than far month price. See here for their contract tables: http://allaboutoil.blogspot.com/2008/05/must-know-concept-for-commodities.html

It is complicated to understand? If this is so, then you can simply trade commodities contracts that do not expire. ForexYard is one of the few platform that offers gold, silver and oil contracts that do not have expiration date. To open the account, click here and click on the logo inside. Choose Standard Account for account opening.

For trading ideas on commodities, go to www.CommoditiesTradingPro.com.

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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Commodity ETFs: How to Profit from Lower Risk Exposure

A common mistake made by many investors is to allow themselves to become intimidated by the world of commodities. Yes, it is true that investing in commodities can be risky, probably more so than stocks and definitely more so than buying bonds or mutual funds, but that doesn’t mean commodities should be ignored altogether when constructing your portfolios. If nothing else, commodities are a great way to hedge your portfolio against the vagaries of inflation. After all, the major commodities, such as crude oil and gold are denominated in US dollars. Meaning that when their prices rise, the purchasing power of dollars is weakened.

Fortunately there’s a way for astute investors to benefit from this scenario without incurring unnecessary risks.

Commodities ETFs Save The Day

As the popularity of the ETF (Exchange-Traded Fund) has surged in recent years, so has the number of commodity-centric ETFs. There are now hundreds of commodity ETFs available to investors. These offerings are ideal for investors seeking commodities exposure without the risk involved in playing the futures markets. Name a commodity and there’s probably a corresponding ETF. Everything from crude oil to coffee to gold to forex futures has been rolled into an ETF.

So what’s the advantage of owning shares in a commodity compared to the corresponding futures contract? As we’ve already highlighted, commodity ETFs significantly diminish your risk exposure. Commodities markets are notoriously volatile and it is possible to lose more than your initial investment on a commodities contract if you’re not careful. Since commodities ETFs are just like other ETFs in that they trade like stocks, your risk is simply limited to the daily performance of the ETF.

What Makes Commodities ETF Different

If you’re familiar with equity ETFs, you probably know that these funds hold a group of stocks that fit a certain criteria. For example, the SPDR S&P Retail ETF (XRT) holds only retail stocks. That’s generally the point of equity ETFs: To give investors exposure to a variety of stocks in a single sector. On the other hand, commodities ETFs may hold the actual physical commodity the ETF is supposed to be tracking, futures contracts with varying dates for that commodity or a mixture of both.

If you follow the oil sector, you have heard of the United States Oil Fund ETF (USO). USO is designed to closely mirror the daily price action in West Texas Intermediate Light Sweet crude oil. USO invests in crude oil futures contracts, cash-settled options and forward oil contracts. However, it does not directly own physical oil.

Now if you’re looking for a commodity ETF that actually holds the physical commodity, gold is the area you might want to look. Take the SPDR Gold Shares (GLD). GLD, which is designed to mirror the daily performance of gold prices, holds actual gold bullion. In fact, GLD has quickly become one of the largest holders of gold in the world. This ETF owns more gold than the central banks of many of the world’s countries. GLD never sells its gold unless it needs to pay expenses related to operating the fund.

These are just two examples of how commodity ETFs are different from their peers and there is no empirical evidence to suggest that commodity ETFs that hold futures contracts outperform those that hold the physical asset or vice versa.

Commodities Have Long-Term Potential

One of the axioms that investors hear about quite frequently is investing for the long-term, especially as it pertains to stocks. Well, that certainly applies to commodities as well. Certainly, commodities have a penchant for wild price swings, and it’s difficult for retail investors to purchase futures contracts that are more than a couple of months out, but history has show that despite the price swings, commodities typically return to their long-term averages.

This makes commodity ETFs all the more appealing because their ideal holding periods are often more favorable to investors that don’t need to make a quick buck. Holding a commodity ETF for a year or more probably isn’t ideal, but a holding period of say, several months doesn’t enhance risk and can put the investor in position for some nice returns.

The Trend Is Your Friend With Commodities ETFs

That’s another old investing adage that you’ve probably heard a million times, but being on the right side of the trend is always important, especially with commodities. Bullish commodity trends can last for extended periods and commodities don’t need a bull market in stocks to have bull markets of their own. So make sure a positive trend is forming in the commodity you’re considering before diving into its corresponding ETF.

Author: Max D.
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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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