Commodity Introduction
Commodity markets are described as continuous auction market and as a clearinghouse for the latest information about supply and demand. The commodity markets are a meeting place of buyers and sellers in a multitude of commodities that include agricultural products, precious metals, petroleum products, financial instruments, foreign and domestic currencies and stock indexes. Growing in popularity, options on futures contracts trading have enabled option buyers to participate in futures markets with limited risks.
Aside from the rapid growth and diversity of the commodity futures markets, the primary purpose remains the same as it has been for over a century and a half, providing as an efficient and effective mechanism for the management of price risks. By buying or selling commodity contracts traders and businesses seek to achieve what amounts to insurance against adverse price changes. This is called hedging. To indicate the scope of the commodity markets growth, volume reached 179 million commodity and options on futures contracts in 1985 compared from 14 million futures in 1970.
Commodity market participants include speculative investors who accept the risks that hedgers wish to avoid. Most speculators have no intention of making or taking delivery of the commodity but, rather, seek to profit from a change in the price. That is, they buy when they anticipate rising prices and sell when they anticipate declining prices. The interaction of hedgers and speculators helps to preserve the liquidity and competition in the markets. Speculative investment in futures trading has become increasingly attractive with its varying methods of participation. Many futures traders continue to prefer to make their own trading decisions others choose to utilize the services of a professional commodity broker to aid in avoiding the daily trading responsibilities by establishing either a full service trading account or participating in a commodity pool which is similar in concept to a mutual fund.
For those individuals who fully understand and can afford the risks, which are involved, the allocation of some portion of their capital to futures trading can provide a means of achieving greater diversification and a potentially higher overall rate of return on their investments. There are also a number of ways in which futures can be used in combination with stocks, bonds and among other investments.
Speculation in futures contracts, however, is not appropriate for everyone, as it is possible to realize substantial profits in a short period of time; it is also possible to incur substantial losses in the same period of time. Large profits or losses in relation to the initial investment of capital are based principally from the fact that commodities are highly leveraged. Only a relatively small amount of money is required to control assets having a much greater value. As will be discussed, the leverage of futures trading can work for you or against you, depending on the direction you initially anticipate.
It is not the purpose to suggest that you should or should not trade commodities, that is a decision that should be made only after consultation with your commodity broker and in light of your own financial situation and objectives.
In order to help better provide you with the kinds of information you should obtain along with questions you should seek answers to, consider the following:
- * Information about the investment itself and the various risks involved
- * How liquid is the market and how readily your positions could be liquidated if desired
- * Who the other market participants are
- * Alternate methods of participation
- * How prices are arrived at
- * What are the costs of trading
- * How are gains and losses are realized
- * What forms of regulation and protection exist?
- * The experience, integrity and history of your broker
- * The financial stability of the commodity firm with which you are dealing
 Commodity Futures Trading Commodity Futures Menu Futures Market 
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