The commodity market is something that excites risk takers and those who want to expand their investment portfolio. If you are involved in investment as a result of your professional position then you may want to consider investing in commodities through the futures market.
The commodity market is also an attractive option for investment professionals looking to diversify into another area aside from stocks and bonds. Entry into the commodity market used to be significantly more complex, but now trading has become much simpler. Here we’re looking at investing in the commodity market through a futures contract.
Futures Contracts for Commodity Investments
One of the most popular ways to invest in commodities is through the futures market. A futures contract is an agreement to buy or sell, at a point in the future, a specific quantity of the commodity in question at a specific price. Futures are available on both soft and hard commodities including crude oil, gold and cattle.
The majority of people involved in the futures market are involved professionally in the commodities they trade. They may be commercial or industrial users of the chosen commodity, and their investment is based upon a need to reduce risk if price changes occur. Other speculators involved in futures contracts are simply looking to profit from changes in the price of the contract.
To invest in a futures contract you may need a new brokerage account if you do not have a broker who already trades in futures. You are also required to sign an agreement to show you acknowledge the risks associated in trading in futures.
Different commodities have different minimum deposits dependent upon your broker and the global commodity prices relating to the chosen product. The value of your account, once set up, will then increase or decrease with the value of the overall contract. If the value of the contract decreases significantly you may be required to place more money into your account to keep your position open.
Pros and Cons of Futures
Different types of investor have different opinions about the futures market, but it does have its advantages. Firstly, it is a risky choice but the leverage involved allows for big returns on your investment if the trade goes the right way.
There’s also the scope for a minimum-deposit account to control a full size contract which would usually be unaffordable. Finally, there is the chance to make both long-term and short-term investments dependent on your investment portfolio.
Experts also highlight some of these advantages as disadvantages. Most clearly the leverage’s scope to allow for big profits also means there is the chance of big losses. Secondly, the futures market is not usually recommended for inexperienced investors as it can be very volatile and involves high risk decision making.
Finally, you have to be prepared for trades to change rapidly. In the commodity market it’s possible that your initial deposit may be lost before you have closed your position.
The commodity market is competitive and a futures contract is not the only way in. If you’re new to trading you may want to consider different options before deciding to stake your claim.
About the author – Katherine Irwin is a commodity trading specialist who manages commodity strategies for her company. She researches with a range of independent commodity experts including CRU International.