Know More About Commodity Trading

January 30, 2020

Commodity trading is where stocks are represented as a publicly traded entity, and commodities are the raw, unprocessed materials of the global economy.

They include:

  • Energy (crude oil, heating oil, natural gas, coal, gasoline),

  • Metals (gold, platinum, palladium, silver, copper, nickel),

  • Livestock and Meat (lean hogs, pork bellies, live cattle and feeder cattle),

  • Agriculture (corn, soybeans, wheat, milk, rice, cocoa, coffee, cotton, sugar, frozen concentrated orange juice)

 

 

Difference between Future and Stock

 
Time Limit:
 
As their name suggests, Futures contracts are contracts for delivery of a commodity in the future. This is why commodity contracts always have a delivery month assigned to them.

If you were trading December Corn, then you are trading Corn which has a December delivery. While you would never actually take delivery of a contract, it is nevertheless important to stay aware of when the contract is due to expire. As the contract gets closer to expiration the market gets thinner as only the traders who actually need to take delivery of the commodity (ie. grain mills) remain.

In contrast you can own a stock for as long as the underlying company remains in existence. This is why “buy and hold” is such a popular strategy among stock traders. You can buy into a company and hold onto to the stock for as long as necessary to realize a profit.

“Buy and hold” would not work very well in the Futures markets unless you had VERY deep pockets. Given the extreme leverage that Futures offer, most traders are not able to sustain substantial draw downs against their positions. Again, because Futures trades are contracts with a buyer and a seller, if the market moves against you, you need to “pay” for that loss immediately.

 

Buyers and Seller:
 

The commodity markets are usually so liquid that it is never a problem to find someone to take the opposite side of your trade. In most cases the fills are nearly instantaneous. Contracts require a buyer and a seller. It doesn’t matter if you are entering into a contract for a house, a car, or 5000 bushels of Corn, every contract has a buyer and a seller. It is no different in Futures.

On the other hand, in the stock market you can only purchase as many stocks as are available for sale by a particular company. If ABC Company is not issuing any more stocks, and you can not find anyone willing to sell you their shares, you can not buy stock in ABC Company.

 

Owning Stocks and Contracting Futures:
 

The principle difference between stocks and Futures is that you “own” a stock and you “enter into a contract” in Futures. When you buy a stock you are literally buying a part of the company you are investing in. This is why stocks are referred to as “shares”, because you own a share of the company.

However, in Futures, instead of actually “buying” the underlying commodity, like corn or wheat or cotton, you are merely entering into a contract for that particular commodity. This means that you can contract to be a buyer or a seller of a commodity.

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