Beginners Guide To Commodities Futures Trading

The commodities market has its fair share of successful investors. This is an attractive investment considering the minimal capital investment to profit ratio. However, as with any other market, the commodities market also has its fair share of risks. Some have made millions from a couple of thousand dollars over the years, while some have borne the brunt of a volatile market. If you think of trading as a means to get-rich-quick, then you may end up being a loser. The main thing is to exercise caution and not treat it as a gamble. The key is to be content with reasonable returns rather than look for huge profits.

Trading in commodities is also known as futures trading. Unlike shares, bonds, and stocks you do not purchase or own anything in futures trading. All you do is speculate the future price of the commodity you are trading and investing in. Nothing else changes hands, except for a futures contract between the buyer and the seller. For example, you need to buy a futures contract if you speculate in wheat thinking that the price is likely to rise. In the same way you would need to sell a futures contract if you determine that prices were likely to fall. Both, the buyer and the seller, do not need to physically own the commodity. All you need to do is deposit sufficient funds with a brokerage firm to cover any losses they might incur.

While speculators play a major role in the commodities market, producers and consumers have a fair share of participation in the market as well. If a producer, who is a farmer owing wheat fields, decides that his harvest won't be ready for a few months, and foresees a drop in prices, he can sell a futures contract equivalent to his crop and deliver the wheat to fulfill his obligation. No matter what the fluctuation in price is until the crop is delivered, the farmer is guaranteed payment as per the current price.

The same is with a flour manufacturer who requires lots of wheat. His main concern would be a rise in price over the next few months. In this case he can buy a futures contract at the current price and fulfill his obligation at when the wheat is delivered. This is the best way to protect him from any rise in prices, as he ends up paying no more than the current price.

The futures market also includes financial instruments such as currencies, bonds, and shares. Producers and consumers play their role in these instruments too since they need to hedge their risks. At the same time, speculators provide the liquidity to the market with the speculation, even though they don't have to deal with the physical delivery or purchase of commodities. Speculators only offset their positions before the delivery date of the contract. With an appreciation in prices, speculators will obviously stand to profit. This also helps to maintain a transparent market with smaller fluctuations.