Commodity Futures Trading Is Not For Everyone

2007-03-08 10:33:40

( Financial )



If you are familiar with stocks trading, then you will not find commodity futures trading difficult to understand because both are similar in some ways. But commodity futures and options trading may not suit everyone since it is often associated with more risks than stocks trading.

When you engage in commodity futures trading, you are not actually buying or selling any commodity. You are merely giving your consent to buy or sell the commodity in the future at a specific price. To do this, you should deposit an amount of money with a brokerage firm to insure that you are capable of paying losses in trading.

Theoretically, everybody can invest in commodity futures trading. But in practice, you will most likely find two types of individuals who are engaged in commodity futures trading: the hedgers and the speculators. Companies that produce certain commodities may want to have some protection against downward price fluctuations on their product. They get that protection by hedging, or locking in a selling price now on future deliveries of their product.

Speculators do not produce their own product but are simply trading on paper transactions. They try to make more accurate forecasts of price movements in commodities. They make money on the arbitrage between current prices and their own forecast of future prices. These speculators provide liquidity and assume the risk of fluctuations in the futures market. For this reason, you will find some speculators who gain large profits, but many also lose most of their investments.

If you intend to invest in commodity futures trading, you must be psychologically ready to take large risks. You should also make sure that you have the discipline. You can devise some futures trading strategies on how to reduce the risks in commodity futures trading if you find time to do your research.


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