How Commodity Trading Works
Posted By:- Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
In July 2017, Forbes1 predicted an “explosion” of activity in commodities trading, and that prediction may have been right on the money; a bullish U.S. commodities market recently danced from summer to fall. As of September 5 2017, energy and non-energy commodities saw a respectable gain, but metals, minerals, and precious metals jumped as high as 8.2 percent. All that glitters is not gold; maybe it’s iridium! And maybe it’s time you learned about commodities trading as an investment strategy.
What are Commodities and Commodities Trading?
In the U.S., futures and option markets are regulated by the Commodity Futures Trading Commission. A commodity is a product that can vary in quality or grade. However, a futures contract of a commodity product is standardized, regardless who is the producer/seller. In addition to energy (oil and fuel, gasoline and natural gas), other commodities trading items include:
- Agro-based (cotton, corn, lumber, oilseeds, wheat, etc.)
- Livestock (cattle, chicken, pigs and pork bellies, etc.)
- Metals (aluminum, copper, nickel, zinc, etc.)
- Precious metals (gold, iridium, platinum, rhodium, silver, etc.)
- Soft – These products are grown and harvested rather than mined (Cocoa, Coffee, Fruit, Soybeans, Sugar, etc.)
- U.S. Equities
The commodities market is driven by supply and demand. You can try to predict, based on previous years, what this year’s cotton crop will yield. But if disease damages much of U.S. cotton crops, supply is lowered and demand prices rise.
Futures Trading
Commodity traders try to make money by predicting the price (higher or lower) of a commodity during a specific timeframe. But buying futures is one of the popular ways to invest in the commodities market. You’re buying commodities and, based on previous years’ yields and this year’s outlook, you’re hoping to sell, at some later time, for a profit. Another nice feature of trading futures, is that you can sell first ( go short) if you feel prices are going to drop and buy later, hopefully at a lower price for a profit or at a higher price for a loss. At no time will a truck unload a thousand bushels of apples in your driveway because you will “close out” before actual delivery.
A futures contract specifies:
- Delivery terms
- Price
- Quality (grade)
- Quantity (size/amount)
Hedging, Speculation
Large corporations often invest in futures trading to assist with cash flow management. They often use “hedging” as a way to offset possible losses; for example, airlines need fuel, a commodity with fluctuating prices. They buy fuel at fixed rates – hedging – to combat the uncertainties of the energy market.
“Speculation” is an opportunity and risk for people who are not involved in commodity trading to trade on the fluctuation of commodities’ prices. Speculation is usually initiated with a small margin amount . . . and the contract can be sold/completed anytime during trading hours.
Spot Price
Futures contracts are . . . well, about the future. A commodity trade in which the commodity could be contracted and delivered now – on-the-spot – is the “spot price.” It’s seldom that a trader buys at spot price; usually, it’s a percentage over.
The History of Commodities Trading
Farming as a way of life began approximately 10,000 BC and led to a type of agricultural revolution circa 8,500 BC in which trading between communities began. “There is evidence that rice may have been traded as far back as 6,000 years ago,” says universalclass.com, but the first recorded commodity futures trading took place in 17th century Japan. The commodities’ prices were impacted by supply and demand as well as weather and conflict between settlements. Problems of storage while items were bought and sold surfaced.
Ways to Trade
You can choose from self-directed trading or use commodities brokers; both have advantages, both have risks, and both can be rewarding! DIY (do-it-yourself) Online commodities trading includes day trading, options, mobile trading, swing trading, or placing call-in orders to a 24/7 trading desk. Broker-assisted traders can take advantage of experienced advice from a knowledgeable professional who understands individuals’ short- and long-term goals. Commission rates can be as low as $9.95 per side and the minimum to open an account is $3,000. As a broker-assisted trader, you’ll have instant access to your broker.
Today is Not Too Soon
Investment in knowledge
Pays the best interest.
-Abraham Lincoln
At Cannon Trading, we believe knowledge is power. The more you study commodities trading, the better you can manage risk, profit, and loss. As you begin learning, take small, careful steps and your commodities trading advisor will help you until you feel more knowledgeable about commodities trading. Check out some of the tools we provide for our friends and clients:
For almost 30 years, we’ve helped newcomers as well as experienced traders with success-driven guidance. Call 310.859.9572, 800.454.9572, or contact us today to learn how we can match or offer among the lowest commission rates in the industry without compromising integrity of service.
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
