I should begin this article by disclosing the fact that I have never traded commodity
futures and my acquaintance with this topic is through research. Most investors are
familiar with stocks, bonds, and mutual funds as forms of investment. Too often
commodity trading is ignored even though it has many advantages over other types of
The principal attraction of commodity trading is its potential for large profits in a
short period of time. In spite of that, because most people lose money, commodity
trading has gained the reputation of being too risky for the individual investor. The
truth is that commodity trading is as risky as you want to make it. If you act prudently
by doing your research and having someone with more experience aide you, then your
prospects should be good.
Unlike other kinds of investments, such as stocks and bonds, when you trade
commodity futures, you do not truly buy or own anything. You are merely speculating
on the direction of the price of a certain commodity. If you believed that the price of
wheat was going to rise, you would buy future contracts. Conversely, if you thought
the price of wheat was going to drop then you would sell future contracts.
In addition to buying futures on products like wheat and corn, one can buy futures in
currency and market indices. An advantage of trading futures on market indices is that
you have to invest a lot less money than you would if you were buying stocks. For
instance, a $10,000 futures contract on the S&P 500 is equivalent to about $350,000
dollars in stock. Let's say you are expecting the stock market will go up in the short
term, you could buy many of the stocks that compose the S&P 500 stock index (the
route most people take) or you could buy an S&P futures contract . If you invested
$350,000 in stocks in the S&P 500 on the first trading day of September 1996 and held
the investment for two weeks you would have made a profit of $20,000. If you,
instead, bought a $10,000 futures contract on the same time period you would have
made the same $20,000, a two hundred percent gain.
The downside is that commodity trading is usually done on margin to leverage your
investment so a small downward swing in the price could cost you your entire
investment. For this reason one must be discreet and make informed decisions.
Commodity futures trading is not a replacement for other forms of investment, it
simply offers another way of obtaining diversification in one's portfolio.
Do you think gold prices will go up further?
Are you sure that crude oil prices are going to fall?
Have you heard that the soya crop this year is bad and will result in soya prices going up?
If you believe that these predictions have a good chance of coming true and are willing to bet
More and more stock brokers are setting up commodity brokerages as well, and trading volumes in commodity futures is widely predicted to rival the volume of derivative transactions (futures and options) on the stock exchanges.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month, two months, three months
to worry about actually buying the gold.
Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm.
Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm.
You can sell the Gold Futures any time before expiry of the contract.
Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the
same way in which stock prices or stock futures prices are quoted on a daily basis in the stock
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