Most Americans believe the stocks, mutual funds, and bonds are reliable investments. There are other types of investments that are also profitable. Commoditys futures are an investment opportunity that is often over looked by many investors. Many investors believe that the commoditys market is similar to the gambling in a casino. Commoditys are a risky investment, but the higher the risk the higher the capital gains. This web page is designed to introduce commoditys to investors.
There are a number of different commoditys. Futures contracts are traded
in government regulated exchanges. The most popular exhange is the CBT or Chicago board
of trade. A Futures contract is "an agreement for the future delivery of a commodity
at a specified date."(Mayo, 1997) A futures contract specifies the type of commodity,
the specific amount, the agreed price in a specific month. Unlike stocks, and other
securities, futures contracts do not realize any dividends, interest, and do not
give any equity in a firm.
| EXAMPLE OF DIFFEREN TYPES OF COMMODITIES | ||||
|---|---|---|---|---|
| Cotton | Cattle products | Orange Juice | Pork bellies | Butter |
| Rye | Sugar | Live Cattle | Flaxseed | Corn |
| Oats | Eggs | Money | Cocoa | Soybean |
| Barley | Wool | Tallow | Potatoes | Wheat |
There are two groups of traders that work the market. Speculators and Hedgers, each group attempts to profit and are driven by different motivations. Speculators attempt to profit, by anticipating future price movements. Trading commodites is very risky, but returns on investments are often very high. Futures contracts require a margin which is a "good faith deposit made when purchasing or selling a commodity conract." (Mayo, 1997) Herbert Mayo provides an example to help exlpain how a speculator might trade. "Consider a contract to buy wheat at $3.50 per bushel. this contract controls 5,000 bushels of wheat worth $17,500. The trader buys the contract putting up a margin of $1,000. A $0.20 increase in per bushel price of the commodity increases the worth of the contract by $1,000. A 100% capital gain, this is a result that a comes from the leverage a small margin requirement and the large amount of commodity controlled by a contract." This example illustrates the large profits profits, but it assumes that the price of the commodity is going up. The opposite can also happen, and the trader loses their initial investment. Futures trading is very risky, so it is wise to take care of all of your financial obligations before speculating on the market. Hedgers work the other side of the market. Traders try to hedge against price fluctuations, so that they can lower their risk. "The cost of production, marketing or processing is reduced by hedging, which shifts the risk of price fluctuations, benefits in the form of cost savings are past on to consumers. Hedgers are attempting to insure a profit in their ordinary course of business."(Teweles, 1969) Farmers try to hedge their crops by trading, this transfers the risk of price fluctuations. Commoditys take a long time to either raise or grow, during this time the prices can change to either higher or lower effecting the profitability of their projects.
There are two positions a trader can take either long or short. The long position is when a trader buys a contract for future delivery, intending to profit if the value of the contract goes up. The other position is short. This is where a trader sells a contract to deliver the commodity in the future attemping to profit if the value of the contract declines when the price of the commodity declines. Although contracts are sold to either buy or sell a commodity at a fixed price in the future, contracts can be canceled. A contract to buy wheat in the future an be canceled by purchasing a contract to sell wheat within the same specified time period. Most of the futures contracts sold do not get delivered.
Commodities are traded in a similar fashion as stocks. A trader goes through a licensed broker who goes through an exchange. Information for speculating is readily available. Political and economic news is broadcast through several commericial networks. Weekly weather reports are easy to obtain. Supply and demand information can be obtained by contacting the local Department of Agriculture office. Commoditys trading can be very profitable and needs to be reasearched further. If your an investor who is willing to take on some risk might consider investing in commoditys.