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03 Oct 2016

Commodity Trading – Benefits and Disadvantages


Something Commodity Trading?

Commodity futures markets enable commercial manufacturers and commercial consumers to offset the danger of bad future price motions in commodities that they’re attempting to sell or buying.

To be able to work a futures contract should be standardised. They need to have a regular size and grade, expire on a particular date and also a preset tick size. Like, corn futures trading in the Chicago Board of Trade tend to be for 5000 bushels with the very least tick size of 1/4cent/bushel ($12.50/contract).

A farmer might have an area of corn plus in order to hedge from the possibility of corn costs dropping prior to the harvest he could offer corn futures. He’s got secured in today’s price, if corn costs fall he makes an income through the futures contracts to offset the loss from the real corn. Having said that, a consumer like Kellogg may get corn futures to protect against a growth in cost of corn.

To be able to facilitate a fluid market to make certain that manufacturers and consumers can freely purchase and sell contracts , exchanges encourage speculators. The speculators goal should earn profits from dealing with the risk of price fluctuation your commercial users try not to want. The incentives for speculators can be extremely large exactly because there is a considerable danger of loss.

Benefits of product trading

Control. Commodity futures run on margin, and thus to take a position only a portion of the sum total value needs to be available in profit the trading account.

Commission Expenses. It really is loads less expensive to buy/sell one futures contract than to buy/sell the underlying tool. Like, one full-size S&P500 contract is currently worth in excess off $250,000 and might be bought/sold for less than $20. The expense of buying/selling $250,000 could be $2,500+.

Liquidity. The participation of speculators means that futures contracts tend to be reasonably fluid. But how fluid is dependent on the actual contract being exchanged. Electronically traded contracts, such as the e-mini’s are usually more fluid whereas the gap traded commodities like corn, lime liquid etc are not so available to the retail trader and are also higher priced to trade in regards to commission and scatter.

Power to get quick. Futures contracts may be offered as easily since they are purchased enabling a speculator to make money from dropping markets also increasing people. There is absolutely no ‘uptick rule’ for example like there clearly was with stocks.

No ‘Time Decay’. Options have problems with time decay as the closer they arrive to expiry the a shorter time there clearly was for the choice to enter into the funds. Commodity futures try not to have problems with this since they are perhaps not anticipating a specific attack price at expiry.

Disadvantages of product trading

Control. Are a double edged blade. Minimal margin demands can encourage bad money administration, resulting in exorbitant threat using. Not merely tend to be earnings enhanced but so might be losses!

Speed of trading. Usually commodities tend to be gap exchanged plus in order to trade a speculator would need to get in touch with a brokerage by telephone to position your order whom after that transmits that order to the gap to be executed. When the trade is filled the gap trader informs the broker whom after that after that informs his client. This will take some take plus the danger of slippage occurring may be high. On the web futures trading will help decrease this time by providing your client with a primary connect to an electric trade.

Many times a truck of corn in your doorstep! In fact, many futures contracts are not deliverable and are also money settled at expiry. But some, like corn, tend to be deliverable although you gets lots of warning and chance to close-out a position prior to the truck turns up.