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What Are Commodities Futures?

By Edited Sep 22, 2016 0 0

Alternative Investment Option

Among the many different types of investment options, one can choose commodities futures trading. In recent years commodities futures trading has gained popularity as a profitable investment option. There are different types of commodities such as oil, gold, corn, wheat, among many others that are traded through the futures markets. Before making any investment in commodities futures markets, it is necessary to understand the basics, including the terms used in the trading of commodities.

Basically, futures trading means getting into a contract. The agreement defines the terms and conditions to sell or buy a particular commodity at a specific price in the future. The quantity of the commodity is fixed in the agreement. Everything related to the actual delivery of the commodity is defined in the futures contract. There are even cash settlements for some of the futures contracts against the delivery of the commodities.

Trading in commodities is done through a commodity exchange using a futures brokerage. For investors this investment option presents a good way to diversify their portfolio away from the usual bonds and stocks. This also limits the risks that would be there if all the investments were made in a single option.

Among different types of commodities traded on futures markets, there is trading in oil futures. The crude oil prices are volatile and depend on demand and supply. To trade profitably in this commodity one needs to understand the basics of crude oil production and keep abreast of news related to its availability and future supplies.

Trading in corn futures involves contracts where the buyer agrees with the seller to take the delivery of the corn in a specific quantity, at a set date and at a set price. There are many commodity exchanges where corn futures can be traded. At the CBOT (Chicago Board of Trade) corn is traded in lot sizes of five thousand bushels or cents per bushel. Units of 50 tons are used for trading on NYSE Euronext Corn futures market.

Similar to corn, investors can trade in wheat futures through the commodity exchange. The buyer gets in contract with the seller and agrees to take delivery of the wheat in a specific quantity on a set date and at the set price. Wheat futures trading can also be done at the NYSE Euronext or at CBOT. Prices of contracts are quoted in cents per bushel and in dollars.

It was in Chicago, USA when a central dealing facility in 1878 was established that allowed dealers and farmers to carry out commodities futures trading. Over the years, the systems associated with commodities market developed considerably allowing more people to trade. In recent years with the technological advancements in communication and real-time data transfer facilities, more people are able to trade in futures market online and from home. Agreeing to futures prices, an investor can deal with different types of commodities and earn a good profit.

In order to trade successfully, investors must be able to establish the relationship between the expected future price and the current price of a commodity. Along with that they need good information related to the supply of the commodity that will affect its future price. Trading in commodities futures can be rewarding if one follows the basics of investment and remains informed all the time.



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