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Commodity Trading
Date Added: September 1st, 2005
Article provided by Alex Weis
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I should begin this article by disclosing the fact that I have never traded commodity futures and my acquaintance with this topic is through research. Most investors are familiar with stocks, bonds, and mutual funds as forms of investment. Too often commodity trading is ignored even though it has many advantages over other types of investments.
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The principal attraction of commodity trading is its potential for large profits in a short period of time. In spite of that, because most people lose money, commodity trading has gained the reputation of being too risky for the individual investor. The truth is that commodity trading is as risky as you want to make it. If you act prudently by doing your research and having someone with more experience aide you, then your prospects should be good.
Unlike other kinds of investments, such as stocks and bonds, when you trade commodity futures, you do not truly buy or own anything. You are merely speculating on the direction of the price of a certain commodity. If you believed that the price of wheat was going to rise, you would buy future contracts. Conversely, if you thought the price of wheat was going to drop then you would sell future contracts.
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In addition to buying futures on products like wheat and corn, one can buy futures in currency and market indices. An advantage of trading futures on market indices is that you have to invest a lot less money than you would if you were buying stocks. For instance, a $10,000 futures contract on the S&P 500 is equivalent to about $350,000 dollars in stock. Let's say you are expecting the stock market will go up in the short term, you could buy many of the stocks that compose the S&P 500 stock index (the route most people take) or you could buy an S&P futures contract . If you invested $350,000 in stocks in the S&P 500 on the first trading day of September 1996 and held the investment for two weeks you would have made a profit of $20,000. If you, instead, bought a $10,000 futures contract on the same time period you would have made the same $20,000, a two hundred percent gain.
The downside is that commodity trading is usually done on margin to leverage your investment so a small downward swing in the price could cost you your entire investment. For this reason one must be discreet and make informed decisions. Commodity futures trading is not a replacement for other forms of investment, it simply offers another way of obtaining diversification in one's portfolio.
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Another Great Site!
Be sure to head over to TeenAnalyst for lots of great investment articles!
TeenAnalyst.com
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Short Selling
Learn about the risks and rewards involved with betting on stocks to go down.
Foreign Exchange Market Basics
Danny Miliaresis gives us a tutorial for understanding the foreign exchange markets...
Stock Scams
Read about some of the scams out there that people have been falling for.
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