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28 Sep 2016

Commodity Trading – Advantages and Disadvantages


What’s Commodity Trading?

Commodity futures markets enable commercial producers and commercial consumers to offset the risk of unpleasant future price moves when you look at the commodities that they are selling or purchasing.

Being work a futures contract must be standardised. They have to have a typical dimensions and level, expire on a particular time and now have a preset tick dimensions. For instance, corn futures trading at Chicago Board of Trade are for 5000 bushels with a minimum tick measurements of 1/4cent/bushel ($12.50/contract).

A farmer might have a field of corn as well as in purchase to hedge from the possibility for corn prices dropping before the collect he could offer corn futures. He has locked in the current price, if corn prices fall he makes an income from the futures contracts to offset the reduction on real corn. However, a consumer such Kellogg may buy corn futures to be able to force away a growth when you look at the price of corn.

Being facilitate a fluid marketplace so that producers and consumers can freely trade contracts , exchanges encourage investors. The investors goal is make money from dealing with the risk of price fluctuation the commercial users try not to desire. The rewards for investors can be very big exactly while there is an amazing risk of reduction.

Benefits of commodity trading

Influence. Commodity futures work on margin, which means that to just take a situation just a fraction of the sum total worth needs to be available in cash in the trading account.

Commission Costs. It really is lots less expensive to buy/sell one futures contract rather than buy/sell the underlying tool. For instance, one full-size S&P500 contract is currently well worth in excess off $250,000 and may be bought/sold for as little as $20. The trouble of buying/selling $250,000 might be $2,500+.

Liquidity. The involvement of investors means futures contracts are fairly liquid. But exactly how liquid hinges on the actual contract becoming exchanged. Electronically traded contracts, such as the e-mini’s are more liquid whereas the gap traded commodities like corn, orange liquid an such like are not therefore easily obtainable toward retail trader and so are more costly to trade in terms of percentage and spread.

Capability to go short. Futures contracts can be sold as easily because they are purchased enabling a speculator to profit from dropping markets plus rising people. There isn’t any ‘uptick rule’ for instance like there’s with shares.

No ‘Time Decay’. Options suffer from time decay as the closer they arrive to expiry the less time there’s for substitute for enter into the money. Commodity futures try not to suffer from this because they are perhaps not anticipating a certain attack price at expiration.

Disadvantages of commodity trading

Influence. Can be a double edged blade. Low margin requirements can encourage bad cash administration, ultimately causing excessive threat using. Not just are profits enhanced but so are losings!

Speed of trading. Traditionally commodities are gap exchanged as well as in purchase to trade a speculator would have to contact an agent by telephone to position the order whom after that transmits that purchase toward gap to-be executed. Once the trade is filled the gap trader informs the agent whom after that after that informs their customer. This could just take some take as well as the risk of slippage happening can be high. On line futures trading will help decrease this time around by providing your client with a direct url to an electronic trade.

You could find a truck of corn on your doorstep! Really, most futures contracts are not deliverable and so are cash satisfied at expiration. But some, like corn, are deliverable even though you can get a lot of warning and opportunity to close out a situation before the vehicle arises.