Commodities

Overview

Commodities are raw materials that can be bought or sold on an exchange. Commodities fall into a number of categories such as grains, precious metals, oil, wool, meat, and other products. A series of financial commodities including currencies, treasury securities, and stock indexes are also traded. An item is called a commodity only if it is utilizable, has enough shelf-life upon delivery, and its fluctuating prices create a potential market for it. Today the investors have limitless options for trading commodities such as futures, ETFs, ETNs, funds, and individual stocks.

How It Works

Buyers and sellers can trade commodities in the spot market, where the buyers are expected to pay the full cash at the time of purchase. Buyers and sellers can also choose to trade in the futures markets, whereby the buyer purchases the obligation to receive a specific quantity of the commodity at a specific future date and at a specific price. Hedgers and speculators indulge in futures trading. The rate of the commodity varies according to its demand and supply. Investors have to first meet certain net worth requirements and must deposit cash into the brokerage controlled margin account to meet the requirements of the broker's dealing in the commodities. There is sometimes a wild swing in the commodity prices. The result could be making a huge amount of money or losing it all in a matter of minutes if the prices do not follow the expected trend.

Benefits

Investing in a commodity lowers the trader's overall chances of risk. Balancing losses from other assets in the portfolio with the investment gains from commodities may serve as a wise investment strategy. Considering the ups and downs that are occurring in other markets allow an investor to comfortably predict the prices in the commodities market and make appropriate, productive investments. However, assets should be evaluated closely in the commodity markets and should not be correlated with the other stock and bond markets. The size of the commodities market is poised to double by 2010.

Cost/Pricing

A small amount of cash can control large quantities of raw materials such as wheat, gold, or treasury bonds when commodities are bought on a margin. An initial margin depending on the specifics of the contract is required to be posted by the trader in his account, followed by keeping a maintenance margin amount updated. Leverage is employed to maximize the return since less cash is needed to control large quantities of goods. Different minimum deposits may be required by each broker for every commodity contract, and the value of the account will fluctuate according to the prices. When the value of the contract goes down, the trader has to deposit additional funds into the account to avoid a margin call.

Timing

There are many tools and technical indicators to determine the timings for investment. It is important to analyze the fluctuating market trends to determine the best buying and selling time periods.

Timing Techniques for Commodity Futures Markets by Colin Alexander is a book dedicated solely to trading commodity futures. It should be very useful for new and struggling traders.

Companies/Industries

The Commodity Futures Trading Commission (CFTC) regulates the futures markets for commodities. There are six major commodity exchanges in the US: The New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange, the Chicago Board of Options Exchange (CBOE), the Kansas City Board of Trade and the Minneapolis Grain Exchange.