A Handbook on Commodity Trading

Although most investors are only familiar with trading stocks, such as stocks or mutual funds, or investing in debt, such as bonds, commodity trading tends to be ignored even though it has many advantages over other types of assets. investment instruments. Let’s start by defining what a “commodity” is in the first place. Commodities can come in many forms. The most commonly traded commodities include lean hogs, live cattle, oats, wheat, metals, and even coins.

One of the attractions of commodity trading is the ability to make big profits in a considerably short period of time. However, commodity trading is considered extremely risky by most companies, as most investors tend to lose money. However, by conducting your due diligence and determining whether the commodity you are interested in is undervalued or overvalued, let’s say if you want to go long or short respectively, you may be able to minimize the risk involved in commodity trading. It can also be helpful to have an experienced commodity trader by your side to guide you.

When you trade commodity futures, you don’t really buy or own anything, unlike other types of investments, such as stocks or bonds. You are simply speculating on where the price of a certain product will go. If, after researching, you think the price of coffee is going to go up, you would buy future contracts or go long. On the other hand, if you were under the impression that the price of sugar was going to drop, then you would either sell future contracts or go short.

As mentioned above, you can also buy futures on currencies or market indices, in addition to buying or selling futures on commodities such as cattle and pigs. An advantage of trading futures on market indices is that you do not need to invest a lot of money, rather than having to invest a considerable amount of capital if you were to buy individual stocks. Let’s illustrate with the following, a $ 10,000 futures contract on the Nasdaq equates to about $ 200,000 worth of stocks. Suppose you expect the market to rise shortly, you could potentially buy many of the stocks that are part of the Nasdaq stock index (the herd mentality), or you could buy a Nasdaq futures contract. Suppose you invested $ 200,000 in stocks on the Nasdaq, and if the index had risen, you would have made a profit of, say, $ 25,000. However, if you instead bought a $ 10,000 futures contract simultaneously, instead of investing $ 200,000, you would have made the same $ 25,000, investing with much less equity in the first place.

One downside of commodity trading is that it is usually done on margin to leverage your investment, so a small drop in price could cost you your entire investment. It is for this reason that one should do their due diligence and decide for themselves whether a given futures contract will be a prudent investment. While commodity trading can be fun, but not risk-free, it offers investors another way to diversify their investment portfolios.