Commodity Trading – Advantages and Disadvantages

What Is Commodity Buying and selling?

Commodity futures markets allow commercial producers and commercial individuals to offset the possibility of adverse upcoming price movements in the commodities that they are promoting or shopping for.

In get to operate a futures deal should be standardised. They have to have a normal sizing and grade, expire on a specific date and have a preset tick measurement. For case in point, corn futures buying and selling at the Chicago Board of Trade are for 5000 bushels with a minimum tick size of 1/4cent/bushel ($12.50/agreement).

A farmer may well have a area of corn and in order to hedge from the chance of corn charges dropping before the harvest he may well sell corn futures. He has locked in the latest rate, if corn price ranges fall he will make a income from the futures contracts to offset the loss on the actual corn. On the other hand, a customer these kinds of as Kellogg could get corn futures in buy to protect in opposition to a increase in the value of corn.

In get to aid a liquid current market so that producers and people can freely get and sell contracts , exchanges encourage speculators. The speculators objective is to make a gain from having on the possibility of price fluctuation that the business users do not want. The rewards for speculators can be pretty huge specifically since there is a considerable risk of decline.

Advantages of commodity investing

Leverage. Commodity futures function on margin, this means that to choose a placement only a fraction of the overall price requires to be obtainable in money in the buying and selling account.

Fee Expenditures. It is a large amount less costly to buy/offer a single futures deal than to obtain/market the underlying instrument. For case in point, just one complete size S&P500 deal is now value in extra off $250,000 and could be bought/sold for as little as $20. The expense of obtaining/advertising $250,000 could be $2,500+.

Liquidity. The involvement of speculators means that futures contracts are fairly liquid. However, how liquid is dependent on the real agreement becoming traded. Electronically traded contracts, these as the e-mini’s are inclined to be the most liquid whilst the pit traded commodities like corn, orange juice and so forth are not so conveniently readily available to the retail trader and are extra high priced to trade in conditions of fee and unfold.

Capability to go quick. Futures contracts can be offered as very easily as they are acquired enabling a speculator to financial gain from falling markets as nicely as rising types. There is no ‘uptick rule’ for case in point like there is with shares.

No ‘Time Decay’. Solutions suffer from time decay because the closer they come to expiry the fewer time there is for the alternative to come into the income. Commodity futures do not suffer from this as they are not anticipating a individual strike cost at expiry.

Down sides of commodity trading

Leverage. Can be a double edged sword. Minimal margin needs can stimulate lousy money administration, main to extreme chance getting. Not only are gains increased but so are losses!

Pace of investing. Usually commodities are pit traded and in purchase to trade a speculator would want to call a broker by telephone to location the buy who then transmits that buy to the pit to be executed. The moment the trade is crammed the pit trader informs the broker who then then informs his client. This can consider some get and the risk of slippage transpiring can be large. On-line futures investing can aid to cut down this time by providing the shopper with a immediate website link to an electronic exchange.

You may uncover a truck of corn on your doorstep! Essentially, most futures contracts are not deliverable and are hard cash settled at expiry. Nonetheless some, like corn, are deliverable despite the fact that you will get a good deal of warning and prospect to near out a posture in advance of the truck turns up.