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Commodity Market : How to trade in Futures?
1. Commodity Market : How to trade In Futures ?
The most common perception of futures is that they are a form of very high risk speculation. I won't deny
this, but futures are also a widely used financial tool for reducing risk. Trading in commodity futures is the
same way as investing in stocks and bonds, and mutual fund managers. There are three main uses of
futures trading :
• Capital Appreciation
• Leverage
• Hedge Against Risk
The reason futures behind the riskiness of commodity futures is because they are usually bought on
margin, and each futures contract represents a large amount of the underlying asset.
Trading With Commodity Futures
Futures trading in commodoty market is not every
child's play!! You can invest in the commodity
futures market only when you are sure of the risks
involved and the amount of risk you're willing to
take.
Consider following these steps:
1. Talk to your broker and ask questions
before opening a futures account : The first and
foremost rule to be taken care as a futures trader is
you should have a solid understanding of how the market and contracts function. You'll also need to
determine how much time, attention, and research you can dedicate to the investment.
2. Self Trading : Self trading involves trading with your own account without the aid or advice of a
broker. But, this definitly involves the maximum risk because you become responsible for managing
funds, ordering trades, maintaining margins, acquiring research and coming up with your own analysis of
how the market will move in relation to the commodity in which you've invested. It requires time and
complete attention to the market.
3. Broker trade on your behalf : There are also brokers that specialize in futures trading.
Open a managed account, similar to an equity account and let your broker trade on your behalf, following
the terms and conditions agreed upon when the account was opened. This method can minimize your
financial risk because a professional would be making informed decisions on your behalf. Although, you
would still be responsible for any losses incurred as well as for margin calls. And you'd probably have to
pay an extra management fee.
4. Commodity Pool : Joining a commodity pool, offers the least risk to enter the market. The
commodity pool is a group of commodities which can be invested in. It's rules are simple : no person gets
an individual account; funds are combined with others and traded as one; the profits and losses are directly
proportionate to the amount of money invested. By entering a commodity pool, you also gain the
opportunity to invest in diverse types of commodities. However, since the downside risks of the futures
market does exist in commodity pool, it is essential that the pool be managed by a skilled and highly
proffessional broker.
Well, inspite of all the risks involved in futures it does carry certain strengths.
2. Strengths
• Futures are extremely useful in reducing unwanted risk.
• Futures markets are very active, so liquidating your contracts is usually easy.
Weaknesses
• Commodity Futures are considered to be done with proffessionals only as it's one of the
riskiest investments in the financial markets .
• The market volatilety makes it very easy to lose your original investment.
• You must be very alert about the tax consequences as high amount of leverage can create
enormous capital gains and lossess.
Hope these commodity tips help you in trading commodity well and will surely drive profits to
you.