Commodity Trading Advice
From Adviceopedia
If you have ever thought about investing in commodities, it helps to have good commodity trading advice.
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Commodity Trading Advice
What Are Commodities?
In financial trading, there are three major categories: cash, stock, and commodities. Commodities are physical goods, such as:
- Food and livestock
- Fuel
- Precious and industrial metals
They are traded just like cash or stock. Essentially, with commodity trading, you're betting on the future value of the commodities, just like you do when you trade stock or cash.
What Are Bourses?
Bourses are the equivalent of stock exchanges for commodities. The biggest bourses are:
- The Chicago Board of Trade (especially grains and other agricultural products)
- The Chicago Mercantile Exchange (especially fuels, livestock, and meat)
- The London Commodities Exchange (especially industrial metals)
- The London Metal Exchange (especially precious metals)
How Does Commodity Trading Work?
When you buy or sell a commodity, you're technically selling ownership of that commodity, just as if you bought or sold something in a store. However, since most commodities are impractical to buy and sell that way (“Here's your 30 thousand head of cattle, where would you like me to put them?”), most commodity trading is actually a form of futures trading. You are agreeing to buy or sell a commodity at a certain price on a certain date (which are called forward contracts).
For example, on Monday, you might buy an agreement to sell oil at $65/barrel on Friday. If the price of oil is $66 on Friday, you now can buy that oil for less than its real cost. However, if the price of oil is $64 on Friday, your forward contract is valueless, because nobody will want to buy above market value. It's fairly rare for people to actually buy the oil (which is called taking delivery), but rather, they buy and sell further futures options.
Risks and Opportunities in Commodity Trading
Commodity trading is much faster than the stock market, which means that an investor can make money much faster with good research, good commodity trading advice, or even good instinct. However, an investor can end up with a valueless contract much more easily than he can end up with valueless stock while engaging in day trading.
Commodities trading requires very little upfront investment (known as the margin amount). In order to speculate in stocks, most brokerage houses demand approximately 50 percent of the stock's value. You can speculate in commodities for as little as 10 to 15 percent of the value. However, many speculators have gotten into serious trouble when they essentially made bets that they couldn't cover.
Hedging
Here is one piece of commodity trading advice you should take note of: You can minimize risk in other investments through hedging. For example, if you invest heavily in a company that relies on low copper prices, you may hedge those investments by purchasing a forward contract for low copper prices. That way, if the company's profits are disrupted by rising copper prices, your forward contract will let you make money to offset those losses. If you own the company, you could exercise the contract for delivery and actually purchase the copper at the low price, keeping your production price down.
Commodity Trading Advice for Individual Investors
Bourses work like other stock exchanges, where traders pay to join the exchange. Most of these seats are held by brokerage firms. Brokerage firms can give you commodity trading advice as well as make transactions for you, in exchange for a fee.
You can also invest in a commodities fund or index, similar to buying a mutual fund rather than individual stocks. Some commodities funds cover a range of commodities, such as fuels or precious metals, while others take a cross sample of the commodities market, like a mutual fund that tracks the S&P 500.
Choosing a Brokerage Firm
Timing is important in futures trading, so you want to find a firm with a good execution speed. You'll also want to consider the commission fees and the margin amount the broker requires for each trade.
Placing Commodity Trading Orders
A market order is an order to buy, regardless of the cost. This is why your broker's execution speed is so important. Just placing a market order is the riskiest kind of investment. You can limit your risk (as well as potential gains) by putting in stop orders. Stop orders are just what they sound like; they stop your investment. A stop loss order tells your broker to get your order out of the market after your investment has lost a certain amount of value. A limit order does the opposite; after your investment has gained a certain value, the brokerage automatically cashes in your gains.
