Commodity Market : How to trade in Futures?


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Commodity Market : How to trade in Futures?

  1. 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 wont denythis, but futures are also a widely used financial tool for reducing risk. Trading in commodity futures is thesame way as investing in stocks and bonds, and mutual fund managers. There are three main uses offutures 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 FuturesFutures trading in commodoty market is not everychilds play!! You can invest in the commodityfutures market only when you are sure of the risksinvolved and the amount of risk youre willing totake.Consider following these steps:1. Talk to your broker and ask questionsbefore opening a futures account : The first andforemost rule to be taken care as a futures trader isyou should have a solid understanding of how the market and contracts function. Youll also need todetermine 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 abroker. But, this definitly involves the maximum risk because you become responsible for managingfunds, ordering trades, maintaining margins, acquiring research and coming up with your own analysis ofhow the market will move in relation to the commodity in which youve invested. It requires time andcomplete 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, followingthe terms and conditions agreed upon when the account was opened. This method can minimize yourfinancial risk because a professional would be making informed decisions on your behalf. Although, youwould still be responsible for any losses incurred as well as for margin calls. And youd probably have topay an extra management fee.4. Commodity Pool : Joining a commodity pool, offers the least risk to enter the market. Thecommodity pool is a group of commodities which can be invested in. Its rules are simple : no person getsan individual account; funds are combined with others and traded as one; the profits and losses are directlyproportionate to the amount of money invested. By entering a commodity pool, you also gain theopportunity to invest in diverse types of commodities. However, since the downside risks of the futuresmarket does exist in commodity pool, it is essential that the pool be managed by a skilled and highlyproffessional broker.Well, inspite of all the risks involved in futures it does carry certain strengths.
  2. 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 its 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.