Commodity Future Online Trading
If an investor is a beginner, commodity future online trading can be the answer for building wealth. Some of the areas available are precious metals, foreign currency, agricultural products, grains and oilseeds, cattle, pork, and meat, energy and petroleum, food and fiber, and metals. A wise money manager will develop the skills and resources for building a successful strategy in the chosen area. Many of the discount commodity trading companies offer new traders help from on-staff advisors and consultants to guide their clients through the investing learning process. The more experienced traders can find continuing education, new ideas, and new tools to help sharpen their skills through the Internet. Some of these helps are trading recommendations, research in the area of trading, professional advice on exploring new ways of trading, and free tools to keep up with the markets. Most reputable companies also have an easy-to-use complaint process for their clients.
A person who is beginning in commodity future online trading should first take stock of personal financial experience, assess financial goals, and write down how much he can afford to invest. Writing down goals can help an inexperienced trader avoid investing beyond a person's capacity, especially in this volatile market. Another important asset is to know the commodities arena and option contracts and what the obligations involved in these contracts. It is essential to carefully review any contract before signing. If the client is trading on margin, that person should understand that this can make him responsible for losses beyond the amount invested. Another aspect of this type investing is understanding the exposure risk in the investment. By law, brokers must make available a disclosure document to their clients, and this should be carefully reviewed. The broker will also provide contact numbers for problems or questions. Make sure that the contacts are responsive to calls, returning them promptly and answering them thoroughly because this is the lifeline between the client and the investment company.
Discount commodity trading on the Internet can be difficult because some companies will promise more than they can deliver or advertise claims that are beyond the markets ability. The CFTC is the federal agency involved with watching for fraud in commodity future online trading, and consumers can contact the agency to inquire about specific companies. The CFTCs job is to help educate market users, help protect market participants, and review complaints from participants. The CFTC publishes fraud advisories for the publics information and provides many helps to aid an investor. Each state has a securities commissioner who will assist consumers. States also have securities regulators, who often have their own websites. Other places to contact for information are the National Futures Association, the Better Business Bureau, and the National Fraud Information Center. Some firms may be outside the jurisdiction of the CFTC, so that should be something that a new investor should check out before signing up with any company.
Commodity future online trading is different than buying stocks and bonds. The investor does not actually buy anything and does not own anything. Instead, the client is speculating on the direction of the price of the commodities involved in the trades. In discount commodity trading, a person buys a contract, such as in corn, expecting that the price will go up. At this point, the farmer has a field of corn, but it wont be ready to be harvested for three months. The farmer can sell futures in this crop so that his business wont lose money on his crop if the price of corn goes down. When the crop is ready in three months, the farmer receives the price contracted for at the beginning of the season, no matter what the current price is. In this way, the farmer eliminates his risk from changing prices. But the investor then gets the advantage if the price of corn rises. He takes the risk, but if he trades wisely, he makes money. But the investor must deposit sufficient capital with the broker to insure that he can cover the losses if the trade loses money. On the other hand, the investor can sell the contract early if he thinks the price is going to go down.
Another participant in the commodity future online trading market, according to our example, may be a cereal manufacturer who buys corn for the business. The businessman is also concerned with how the price will change in those three months the corn is growing, so he buys contracts at the price offered by the farmer, assuring that his costs will not go up when the corn is needed. So some participants actually buy and sell commodities, but other just buy contracts to take advantage of rising prices. One advantage of using discount commodity trading is that a large amount of money can be earned in a short period of time. For example, when investing in a CD, the saver gets a certain percentage gain, usually a small amount. With the trade markets, if the price of the oil, or cattle, or metal rises sharply, the investor may be able to sell quickly and make a good profit. However, that entails understanding where the markets are going and when is a good time to buy and sell. Obviously, unlike having money in a CD, this type of investor can lose as much as is gained. Another advantage of using commodities is that the commissions are much lower than with other investing, such as in mutual funds. Many times, commissions on stocks are as much as one percent of both buying and selling. A commission on trading profits may be only $30 to $50 per action. The Bible tells us, The testimony of the Lord is sure, making wise the simple (Psalm 19:7). Use His wisdom when managing your finances.
Commodity Future Option TradingThe business of commodity future option trading is not for the faint of heart. It is a complex and risky endeavor. Surely there are few other investments where the words written in Proverbs 23:5 are better illustrated: Wilt thou set thine eyes upon that which is not? for riches certainly make themselves wings; they fly away as an eagle toward heaven. This is not to say that some people haven't realized great profits, for unless they had, no doubt the history of trading options and futures would have been much shorter. Rather, the intent of this article is that one enter into such pursuits with eyes wide open and after investigating the issue thoroughly. Only by considering one's own financial goals and resources, -- and understanding the process and pitfalls of commodity future option trading -- can wise financial decisions be made.
The most important portion of the decision to enter into commodity future options is that of ascertaining personal goals and resources. Only funds which are not needed for living expenses should be invested. This is not the place to speculate with funds which are needed in the future for a child's education, or retirement expenses. Do not use monies set aside for that down payment on a house, or other dreams, unless one has full agreement with a spouse. There is a great deal of loss experienced in the process of commodity trading. One must be able to ride out periods of loss, or dispassionately dispose of trading contracts which are non-productive. Decisions must be made with the mind rather than the emotions, which is difficult enough without the added pressure of knowing that funds are essential to present lifestyles or future needs.
As to the process of futures trading, some basic information is needed. To understand a futures contract, it would first be helpful to understand a forward contract. A seller agrees to provide a certain amount of product, for a certain price, by a certain date -- say, a farmer agrees to provide 25 bushels of tomatoes at $1 a bushel by June 16th of that year. (This is opposed to a spot contract, where the farmer would immediately load the 25 bushels into the buyer's truck, receive his payment, shake hands and drive off.) This process works well, but it is sometimes difficult to find someone who wants to buy what one has to sell, at the price and time available. Futures, on the other hand, are sold in an exchange where terms are standardized for contract size, quality, delivery months and locations. A wide variety of futures are available not only in agricultural products, but also for precious metals, financial instruments, fossil fuels and non-traditional commodities. Interestingly, in the U.S. at least, prices (especially for agricultural products and other physical commodities) are set in an open outcry type of situation, where traders in a ring or pit call out various bids. In other countries, and increasingly in the U.S. as well, commodity future option trading is done on an electronic platform, and bids and offers are posted on a computerized system.
There are two main types of buyers of commodity future options: hedgers and speculators. Speculators, of course, are those who are seeking to profit from purchases and sales of commodity future options. Hedgers seek to eliminate some of the risk involved in the sale of an actual product or commodity. By purchasing options, hedgers try to avoid losses which could possibly occur due to price swings or the lack of a buyer. Futures are legally binding agreements to buy or sell a commodity in the future, and are standardized by quantity, grade, delivery location and date. Options are contracts which convey the right (but not the obligation) to buy a certain item at a certain price for a limited time period. Only the seller is obligated to perform. Of course, if the buyer does not exercise his or her choice, the right to do so will expire, along with the money spent to obtain it. Commodity future option trading is regulated by the Commodity Futures Trading Commission (CFTC), which reviews the terms of proposed commodity future options contracts to be sure that they include acceptable trading practices and are not subject to manipulation. Companies and people who handle funds or give trading advice must register with the National Futures Association (NFA), an organization recognized by the Commission.
Many futures contracts never arrive at the point of delivery. Instead, owners offset them by purchasing an opposing position from the exchange, which acts as both buyer and seller in each transaction. The actual commodity is sold in a spot market. The owner uses the contract as insurance or a 'hedge' against market uncertainties. This allows the owner to have a variety of options for gaining a profit. However, there is still risk involved because there is no guarantee that options prices and the actual selling prices in spot markets will result in a beneficial outcome.
Risks should be considered at the very beginning of the process of commodity future option trading. Materials outlining risks and past performances must be given to prospective customers. These should be read carefully and any questions addressed before signing contracts. It is especially important to understand the legal obligations involved. Contracts can be purchased by traders on margin. The margin account is to ensure that financial obligations can be met. If the futures market declines, loss occurs in the margin account. If the market is favorable, profits will be reflected in the margin account. However, if the market is unfavorable, at a certain point more money must be posted to the margin account. It is possible that one may find oneself responsible for far more than the original monies invested. It is imperative that an investor check out the firm's registration and disciplinary history with the NFA before commodity future options are purchased.