How to Trade Commodities

The price of commodities increases along with inflation, thereby offering a hedge for the investor. Unlike many investments or the value of the dollar that is setback with the rise of inflation, commodities see an advance. With inflation and a drive in the price of commodities demand often increases as well. Most investors trade commodities by investing in futures. To begin you must open an account with a futures commission merchant or through a broker.

When investing or trading commodities through a futures contract you are agreeing to buy the commodity at a certain date in the future. There are no guarantees that the agreed upon price will be accurate but this ensures that the investor locks in a price. When an investor locks in a price he or she is taking steps to protect their investment from loss. This is known as a hedge protection and is valuable for the person or company that deals in the physical trade of the commodity.

Other investors are known as speculators. These investors don’t see the physical commodity in tangible form but hope to make a profit off of the gain in price. Speculators will close their orders before the contract comes to fruition in order to make a profit. Hedging and speculating are ways to trade commodities without needing to take possession of the physical commodity. Those who wish to take possession of a physical commodity conduct their activity on the spot market. Before you can trade in the futures market you’ll need to open an account and sign a statement indicating your acknowledgement of the risks involved.

When trading commodities it’s important to understand that your contract can increase or decrease in value and you could quickly gain or lose your futures contract. If your contract loses value you may be required to add more money to your account. This is referred to as a margin call and indicates that a broker has requested additional money or security to keep the futures contract open. It may also be referred to as a fed or maintenance call. Just as there are many risks that can deplete your futures account quickly, you can also see incredible gains in just as short a time. There are many instances where futures contracts have doubled their worth in a matter of minutes.

Those who wish to minimize the risk associated with a futures contract can limit the amount of loss according to the option associated with the futures contract. Options are either buy or sell; or call and put. A call option enables the investor to buy the contract at a certain price while a put option enables an investor to sell the contract at a specified price.

There is no doubt that trading commodities can be a rewarding experience but it is important to remember that reward and risk walk hand in hand. Those who make great gains often took great risks to get those gains. Those who strategize to minimize risk may find that making small contracts and little trades that will eventually pay off and minimize the amount of loss. Those learning how to trade commodities should take steps to determine what they will do to limit loss should a contract’s price decline.
 

Some investors decide to trade commodities through a managed account where they have given the power of authority over to another who will make trades on your behalf. Great care should be taken whenever choosing to give this authority to another individual. A managed account is owned by the individual investor and managed by a professional. All managed accounts and money managers should work on behalf of the individual investor, executing their goals and objectives for investments. Many investors choose this route because they believe that a professional is more experienced and qualified at handling investments than the individual investor is.

Commodities are a great addition to every financial portfolio as they are a hedge during time of inflation. When commodities are chosen wisely and investors minimize risk they can be very lucrative and provide profits on a long term basis.