02 Oct 2016

Commodity Trading – Benefits and Disadvantages


Something Commodity Trading?

Commodity futures areas enable commercial producers and commercial consumers to offset the chance of negative future cost motions inside commodities that they are selling or purchasing.

So that you can work a futures agreement should be standardised. They must have a standard dimensions and class, expire on a particular day and have now a preset tick dimensions. For example, corn futures trading at the Chicago Board of Trade tend to be for 5000 bushels with a minimum tick measurements of 1/4cent/bushel ($12.50/contract).

A farmer might have an area of corn as well as in order to hedge against the possibility for corn rates falling before the harvest he could offer corn futures. He’s closed in the current cost, if corn rates fall he tends to make a profit from futures agreements to offset the loss in the actual corn. On the other hand, a consumer like Kellogg may buy corn futures so that you can drive back a growth inside price of corn.

So that you can facilitate a liquid marketplace in order for producers and consumers can freely purchase and sell agreements , exchanges encourage investors. The investors goal is make money from dealing with the possibility of cost fluctuation the commercial users never desire. The benefits for investors can be extremely huge exactly since there is a considerable chance of loss.

Advantages of commodity trading

Control. Commodity futures run on margin, meaning that to take a posture just a fraction of the full total value needs to be for sale in cash in the trading account.

Commission Prices. It really is loads less expensive to buy/sell one futures agreement than to buy/sell the root tool. For example, one full-size S&P500 agreement happens to be well worth in excess off $250,000 and may be bought/sold for as low as $20. The trouble of buying/selling $250,000 could be $2,500+.

Liquidity. The participation of investors ensures that futures agreements tend to be sensibly liquid. But how liquid is dependent on the agreement being traded. Digitally traded agreements, such as the e-mini’s are usually the absolute most liquid whereas the pit traded commodities like corn, tangerine liquid an such like aren’t therefore available towards the retail investor and higher priced to trade in regards to percentage and scatter.

Power to go short. Futures agreements can be sold as quickly because they are bought allowing a speculator to benefit from falling areas including increasing ones. There isn’t any ‘uptick guideline’ for instance like there clearly was with shares.

No ‘Time Decay’. Options have problems with time decay because closer they show up to expiry the less time there clearly was when it comes to solution to come into the income. Commodity futures never have problems with this because they are not anticipating a specific strike cost at expiry.

Drawbacks of commodity trading

Control. Are a double edged blade. Minimal margin demands can encourage bad cash administration, resulting in extortionate danger using. Not just tend to be profits improved but so might be losses!

Speed of trading. Usually commodities tend to be pit traded as well as in order to trade a speculator will have to get in touch with a brokerage by telephone to place your order who after that transmits that order towards the pit to be executed. After the trade is filled the pit investor informs the agent who after that after that informs his client. This will probably take some simply take as well as the chance of slippage occurring can be large. Online futures trading can help to lower this time by giving your client with a direct link to an electronic change.

You might find a truck of corn on your doorstep! Actually, most futures agreements aren’t deliverable and cash satisfied at expiry. However some, like corn, tend to be deliverable although you are certain to get numerous warning and opportunity to close-out a posture before the vehicle appears.