Trading Expert > Future Trading > Commodity Futures Trading

Many people have become rich in the commodity markets. The process of trade in commodities is also known as futures trading. Unlike other types of investments, including stocks and bonds, when trading futures, they do not actually buy anything or own anything. You are speculating on the future direction of prices in the goods being negotiated. This is like a bet on the future direction of prices. The terms buy and sell only indicate the direction you expect future prices will be.

If, for example, speculated on corn, you could buy a futures contract if you thought the price would go in the future. You sell a futures contract if he thought the price would fall. In addition to speculators, both commercial producers of commodities and commercial consumers also participate. The main economic objective of the futures markets is for these commercial participants to eliminate the risk of price changes.

Regardless of how it changes the price of corn in the three months until his crop is ready for delivery, is guaranteed to be paid at current prices.

To protect against this, Kellogg can buy futures contracts at the current price. In three months Kellogg can fulfill its obligations under the contracts for the receipt of corn. This ensures that regardless of how the price moves in the next three months, Kellogg will pay no more than the price of corn.

Each futures market has producers and consumers who need to cover their risk of future price changes. This maintains an orderly market where price changes from trade to another are small.
Since speculators perform the valuable functions of providing liquidity and assuming the risk of price fluctuation can gain substantial returns.

Commodity Trading As an Investment Vehicle

There are many inherent advantages of commodity futures as an investment vehicle over other investment alternatives such as savings accounts, stocks, bonds, options, real estate and collectibles.
For example, if you had a $ 10,000 account trading futures, you can change an S & P 500 stock index futures contracts. You can invest $ 350,000 and individuals buy shares equivalent to the S & P, or you could buy an S & P futures contract. If you have taken the path of future, however, have made the same $ 20,000, which would have been a 200 percent increase in the range of $ 10,000 needed in your futures account.

Of course, you can lose money fast if trade in the wrong direction. Suppose you had thought of the stock market was about to fall and had sold a futures contract instead of buying one. His commission of $ 20,000 futures trading profit would have been only $ 30 to $ 50. Commissions on individual stocks are much as one percent for both buying and selling. That would have been $ 7,000 for buying and selling a set of stock worth $ 350,000.

If you maintain a sufficient margin, you can even spend your current profit of a trade without closing the position. As will be seen, the commodity trade is not particularly complicated. Unlike the stock market where more than ten thousand potential stocks and mutual funds, there are only about forty viable futures markets to trade.

In the futures market, it is easy to sell (also known as going short), as it is easy to buy (also known as going long). There are even tax advantages to make your money in the future. Regardless of the actual holding period, the benefits of commodities are automatically taxed as sixty percent capital gains in the long term and forty percent of capital gains in the short term. To the extent that increased tax rates on capital will be reduced in the future, commodity traders will benefit. If a distinction is restored so that taxes on long-term gains are lower than short-term gains, traders of commodities will benefit.

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