A commodity consists of natural resources and raw materials which make up the basis of industry and food supply, and in the case of gold and silver, an alternative to printed cash. The list includes natural gas, crude oil, live cattle, lean hogs, corn, and wheat as some of the goods with the highest trading volume. If the commodity market seems confusing, follow these commodities for dummies guidelines to learn the basics.
Trading Commodities
Commodity trading activity is a world where the hedgers, such as farmers, protect their profits by purchasing contracts to sell their goods at a certain price, and speculators buy these goods in the hopes the prices will go up or down, depending on their position. The trader who thinks the price will go up is said to have the long position, and if the short position is held they are speculating the price will fall.
Closing out a position refers to the exit strategy of the trader. It is rare that a trade results in the delivery of the commodity for the average investor; instead brokers watch their accounts carefully to keep track of open accounts. Investors are informed ahead of time when the settlement date of a contract is closing in.
It is this time between the opening of the contract and the expiration date when most of the active trading happens. When the buyer does take delivery in today’s market, it usually is in the form of a receipt of purchase they take to the supplier who fulfills it for them.
Placing an Order
There are four common types of futures orders used on a commodity exchange. The simplest is a market order, which gets filled as first priority over other orders. While these may be filled quickly, it is filled at whatever the current bid or ask price is, the trader may not specify. Benefits include not missing an opportunity to get into a specific futures contract.
The opposite of this is the limit order, in which price is specified. When the investor wants to get into a trade at lower than market value, this is the method chosen. For purposes of buying, this means values are lower than the current price; with regards to selling, the price should be above current market value. Investors can miss out on getting into a particular future if the commodity does not rise or fall to the expected numbers, or if there are other orders which need to be executed first.
The investor must specify their order as ‘day’ or ‘open.’ ‘Day’ means it is only active during daytime trading sessions, and is canceled at their close. This is also the default setting and an advantage for anyone without the capability to monitor markets 24/7. A specification as ‘open’ means until it reaches the settlement date, or is filled or canceled. Stop loss orders are the fourth type, and specify the price to stop trading in order to limit loss.
While open commodities activity is not an area for ‘dummies’ with little experience in the markets, with education and practice, the diligent investor can learn to profit while limiting their risk.
Looking for Something? Search here:
(examples: auto, banking, college, credit cards, debt, frugality, insurance, investing, loans etc.)
