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Introduction to Commodities
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
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A commodity is any physical substance, such as food, grains, and metals, which
is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The term is sometimes used more generally to include any product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes. The price of the commodity is subject to supply and demand factors. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be. A speculator can pay the farmer or anyone else producing commodities because the speculator wants to make a profit. This
is called trading in futures.
The following is a list of commodities available for futures trading:
Other Ways to Trade Commodities
Investors can receive advice in the futures market from Commodity Trading Advisors. These advisors make specific recommendations about buying and selling futures contracts after considering the circumstances of the investor.
Managed futures accounts result from giving power of attorney to trade futures to an account manager. Even though the investor is no longer making trades, he is responsible for margin calls, and gains and losses appear as credits or debits respectively in the managed account.
Commodities pools are analogous to mutual funds in that many investors pool their assets to gain the power to make trades that they could not make individually. Additional benefits include bypassing margin requirements and limiting risk to the amount invested in the pool.
In all of these circumstances, investors must receive risk disclosure documents. The document should be read carefully to determine if futures trading is a viable investment option for the investor. Commodity pools also distribute disclosure documents that address the details, management and risks of the pool arrangement.
Investing with the help of an advisor, manager or pool may have its advantages, but it certainly does not eliminate risk or guarantee any degree of success, and we do not recommend commodities or future trading, with or without expert assistance, for any investors who aren't very experienced.
The following is a list of commodities available for futures trading:
- Agricultural: grains, oils, livestock, wood, textiles, food products
- Metallurgical: metals, petroleum, chemicals
- Interest Bearing Assets: T-bills, bonds, notes
- Stock Indices
- Currencies
Other Ways to Trade Commodities
Investors can receive advice in the futures market from Commodity Trading Advisors. These advisors make specific recommendations about buying and selling futures contracts after considering the circumstances of the investor.
Managed futures accounts result from giving power of attorney to trade futures to an account manager. Even though the investor is no longer making trades, he is responsible for margin calls, and gains and losses appear as credits or debits respectively in the managed account.
Commodities pools are analogous to mutual funds in that many investors pool their assets to gain the power to make trades that they could not make individually. Additional benefits include bypassing margin requirements and limiting risk to the amount invested in the pool.
In all of these circumstances, investors must receive risk disclosure documents. The document should be read carefully to determine if futures trading is a viable investment option for the investor. Commodity pools also distribute disclosure documents that address the details, management and risks of the pool arrangement.
Investing with the help of an advisor, manager or pool may have its advantages, but it certainly does not eliminate risk or guarantee any degree of success, and we do not recommend commodities or future trading, with or without expert assistance, for any investors who aren't very experienced.
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