It is not hard to see why many investors are learning to buy commodities in today’s economy. The commodity market has unique advantages when the stock exchanges are struggling and inflation is looming. Having gold, silver, or raw materials futures in a portfolio can help offset the effects of both, and hopefully make the investor money as well.
The way to purchase commodities is through one of several futures exchanges under regulation. Two of the largest are the CME, or mercantile exchange in Chicago, well-known for the small caps of the S&P 500, live and feeder cattle, pork bellies, and lumber. The Mercantile Exchange of New York is another high volume market. Traders specializing in industrial metals, natural energy resources like oil and gas, and energy contracts are the majority here.
Commodities can be purchased through futures or options contracts, or the more liquid ‘etf.’ When it is time to start trading, open a margin account at a well-researched brokerage. The firm chosen should have fast execution time for trades; good analytical tools, and customer service, and be easy to navigate. Before opening an account, compare commission and fee structures, especially if you plan to be an active trader.
The Real Buy
There is more to operating in the commodities markets than buying a contract at a specific price and hoping your analysis was right about the direction of the market. Trades leverage large sums of the commodity, resulting in large gains and losses for a small investment.
Making a one-sided trade can be devastating if you are wrong. If the investor purchases a future on November wheat, anticipating the price to go up, and it falls, they are liable for the full value of the difference in price. For this reason, a hedge or stop loss order is used to limit losses.
When the trader uses a hedge, they are selling short to lock in a certain price. At the same time, they can make a spread by purchasing a futures contract for the long position. This effectively limits the potential for loss, and creates additional ways to profit. There are several types of spreads, such as:
-intra-market; same commodity, different months.
-inter-market; different commodities, different positions
-inter-market calendar spreads; short futures of one kind in a certain month, and long of another kind in a different month.
Learning to use a variety of methods is like putting important tools in the trader’s toolbox; it increases the chances of success, and allows them to adapt to any situation.
Two other ways to make commodities buys are options and exchange traded funds. Options offer the opportunity to make large profits with a small percentage of the value of the trade. As the name implies, the buyer has the option to fulfill the contract, but is not obligated to. Etf’s are traded on the stock exchanges and track a broad stroke of commodities, much like mutual funds do with stocks and bonds.
To buy a commodity, try using a spread or an etf, and do good research before beginning. Set a goal to earn a steady percentage on investments, and follow a strict set of trading rules for consistent results.
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