Commodity Trading

Commodity Trading

Commodity Trading is often described as commodities and futures. These can be generic terms to describe the markets. It is no difference to the way stocks and equities are utilizes when investors discus stock market. Specifically, what they mean is that commodities are the actual physical products like gold, crude, corn, oil and many more. On the other hand, futures are contracts of commodities that are traded at a future exchange. Future contracts have extended beyond just commodities. Presently, there are future contracts on the financial markets like the t-notes, currencies and many more.
Futures are uniform contracts among buyers and sellers of commodities that stipulate the amount of a commodity, quality/grade and delivery location. Commodity trading coupled with futures contracts takes place at a future exchange, and similar to the stock market, it is entirely anonymous.

Different Types of Players in Commodity Trading Markets:

Small Speculators. Individual commodity traders who trade using their very own accounts or through a commodity broker. Both small and large speculators are known for their capability to stir the commodity market.
Large Speculators. A group of investigators that pool their cash together to lessen the risk and increase gain. Similar to mutual funds in the stock market, large speculators have money managers that create investment decisions for the investors as a whole.
Commercials. The individuals involved in the production, processing or merchandising of a commodity. For instance, the corn farmer and Kellogg’s are commercials. This kind of commodity trading accounts for most of the trading in the commodity market.


How to Begin Commodity Trading

Before you start trading commodities, it is important to educate yourself on the futures contract specifications for each commodity and learn about the different trading strategies.

Commodities have the same premise like any other investment – you want to buy in a lower price but sell it in a much higher price to gain profit. The difference with commodities is that they are very much leveraged and they trade in contract sizes rather than in shares. Bear in mind that you can buy and sell positions at any given time when the markets are open, so be assured that you don’t have to take delivery of a truckload of corn.

Managing Your Own Commodity Trading Account

The two major factors to consider when you are deciding to manage your own account or invest in a managed futures fund are time and experience.
Numerous investors work full time jobs and could not commit the time it takes to appropriately manage a commodity trading account. It can be very time consuming to manage commodity trades most especially if you want to do short-term trading. The futures markets are more leveraged compared to stocks, so a hands-on approach is necessary.
You must question yourself honestly if you have the capability to commit your time in the trade. Further, you must also ask yourself if trades will be a disruption in your normal life. It can take anywhere from a couple of hours a week to eight hours each day in order to manage an account, depending on your trading style. It normally does not make sense to put your full time job at risk to manage a commodities account that is only a small part of your overall investment portfolio.

The opportunity costs that are involved in managing a commodity trading account is also a concern. Could you create extra income in the long run by devoting more time to your job? Or, would you prefer spending your extra time with your family and friends? You should evaluate these considerations on whether it makes sense to invest in a managed futures account or you want to do it yourself.

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