A simple way to understand the world of commodity futures is that there are contracts, which are agreements, where an individual or company has agreed to sell or purchase a specific type of commodity, a specific price, and some designated point to the future. These products include animal products, grain, oil, or precious metals, plus they may also include various currencies and financial instruments. There are some limited exceptions regarding trading certain types of futures contracts on the commodity exchange floor.
The Commodity Futures Trading Commission (CFTC) is the federal institution responsible for monitoring and regulating commodity futures, options, and swaps trading markets. If you decide to trade in the futures arena or even give advice regarding commodities, you must first be registered with what is called National Futures Association (NFA), a regulator that works independently along with those that trade futures in conjunction with the public.
Therefore, when you are assessing the different companies that will allow you to trade the futures market, make sure the business, or the individual, is registered with these institutions. You can do this very quickly by accessing the NFA’s BASIC database.
If you are trying to learn how to trade futures in commodities like wheat, gold, oil, and many other things, then you may want to check out USA Futures, they have many great training materials for both novice and experienced traders.
Understanding Commodity Futures
In the United States, commodities represent a very important part of daily life. It is a form of commerce that is used in the transaction of different commodities, and it is also interchangeable with different types of goods and materials. Examples of commodities that are traded include natural gas, oil, beef, gold, and various types of grain.
If your objective is to become an investor in the commodities market size, it’s important to have a diversified portfolio that will have much more than traditional securities. When looking at how commodities tend to move on the market, they are often in opposition to the movement of stocks on the stock market, so savvy investors are constantly looking at the volatility of both commodities and stocks simultaneously.
In the past, people who have attempted to trade commodities have needed to have high levels of expertise, vast amounts of money, and the time to learn how to trade like a professional. Today, the options are much more viable for those that would like to trade commodities.
A History of Commodity Trading
In comparing commodities trading with trading bonds and stocks, it’s much older. Entire empires, throughout the rise and fall, often involved the facilitation of trading systems involving commodities.
Today, the same is true for modern societies. A commodities exchange references not only the need to purchase and acquire different commodities, but takes into account their physical location, plus there are rules that must be adhered to when dealing with standardized commodity contracts that are often used as an investment vehicle.
Characteristics Of the Commodities Marketplace
Supply and demand play a large role in the success and failures of commodities markets. For example, if there is a significant change in supply, this is going to affect demand; higher prices tend to emerge for commodities in low supply. Therefore, if there are going to be disruptions in the future for a particular commodity, such as one that affects the health of cattle, this more predictable and stable marketplace can suddenly have price spikes.
The global economy should also be monitored at all times, along with technological advancements, as these can also affect the prices of commodities. For example, India and China have become major players in this marketplace, especially with looking at industrial metals, and how these various metals, including steel, affect the rest of the world.
How To Use Futures to Invest in Commodities
A futures contract is perhaps the best vehicle for participating in the investment of commodities. This is a legal contract where you are agreeing to sell or purchase one particular type of commodity asset, in the future, at a predetermined price. From the perspective of the buyer, they are obligated to make the purchase, directly after the futures contract expires.
From the perspective of the seller, they have the obligation of making the delivery of the underlying commodity that is represented by the futures contract after the expiration date. Every imaginable commodity can have a futures contract associated with it. In most cases, there will always be two different types of investors when dealing with commodities: institutional users or commercial users, along with speculative investors that make a living trading in the futures marketplace.