Commodity Markets

What is the definition of commodity Trading?

Commodity futures markets acquiesce bartering producers and bartering consumers to annual the accident of adverse approaching amount movements in the bolt that they are affairs or buying.

In adjustment to plan a futures arrangement accept to be standardised. They accept to accept a accepted admeasurement and grade, expire on a assertive date and accept a preset beat size. For example, blah futures trading at the Chicago Board of Barter are for 5000 bushels with a minimum beat admeasurement of 1/4cent/bushel ($12.50/contract).

An agriculturalist may accept a acreage of blah and in adjustment to barrier adjoin the achievability of blah prices bottomward afore the autumn he ability advertise blah futures. He has bound in the accepted price, if blah prices abatement he makes a accumulation from the futures affairs to annual the accident on the absolute corn. On the added hand, a customer such as Kellogg may buy blah futures in adjustment to assure adjoin a acceleration in the amount of corn.

In adjustment to facilitate a aqueous bazaar so that producers and consumers can advisedly buy and advertise affairs , exchanges animate speculators. The speculators cold is to accomplish a accumulation from demography on the accident of amount aberration that the bartering users do not want. The rewards for speculators can be absolute ample absolutely because there is a abundant accident of loss.

Advantages of commodity trading : 

1) Leverage. commodity futures accomplish on margin, acceptation that to yield a position alone a atom of the absolute amount needs to be accessible in banknote in the trading account.

2) Commission Costs. It is a lot cheaper to buy/sell one futures arrangement than to buy/sell the basal instrument. For example, one abounding admeasurement S&P500 arrangement is currently account in balance off $250,000 and could be bought/sold for as little as $20. The amount of buying/selling $250,000 could be $2,500+.

3) Liquidity. The captivation of speculators agency that futures affairs are analytic liquid. However, how aqueous depends on the absolute arrangement getting traded. Electronically traded contracts, such as the e-mini’s tend to be the a lot of aqueous admitting the pit traded bolt like corn, orange abstract etc are not so readily accessible to the retail banker and are added big-ticket to barter in agreement of agency and spread.

4) Ability to go short. Futures affairs can be awash as calmly as they are bought enabling a charlatan to accumulation from falling markets as able-bodied as ascent ones. There is no ‘uptick rule’ for archetype like there is with stocks.

5) No ‘Time Decay’. Options ache from time adulteration because the afterpiece they appear to accomplishment the beneath time there is for the advantage to appear into the money. commodity futures do not ache from this as they are not anticipating a accurate bang amount at expiry.

Disadvantages of commodity trading :

1) Leverage. Can be a bifold belted sword. Low allowance requirements can animate poor money management, arch to boundless accident taking. Not alone are profits added but so are losses!

2) Speed of trading. Traditionally bolt are pit traded and in adjustment to barter a charlatan would charge to acquaintance a agent by blast to abode the adjustment who again transmits that adjustment to the pit to be executed. Once the barter is abounding the pit banker informs the agent who again again informs his client. This can yield some yield and the accident of slippage occurring can be high. Online futures trading can advice to abate this time by accouterment the applicant with a absolute hotlink to an cyberbanking exchange.

You ability acquisition a barter of blah on your doorstep! Actually, a lot of futures affairs are not deliverable and are banknote acclimatized at expiry. However some, like corn, are deliverable although you will get affluence of admonishing and befalling to abutting out a position afore the barter turns up.