Stock Market Tips: the ABC's of Commodity Futures

If you want to trade in the futures market there are a few things that might be helpful to know beforehand. For starters, you'll need some money in advance and sometimes a good credit rating to secure certain types of account needed for the commodity futures trading. Also, some knowledge of what it is you're investing in could be advisable as this may reduce your commodity futures trading risk.

*What are Commodity Futures: Commodity futures are financial contracts derived from a particular physical commodity such as corn or copper. These financial instruments are regulated by the Commodity Futures Trading Commission (CFTC) and are often traded back and forth without delivery and/or transfer of a commodity.

*How they work: Commodity futures are traded on special exchanges such as the Chicago Board of Trade. A buyer of futures contracts often purchases on credit meaning they only have to put down a certain fraction of money to buy the whole contract. As the price of commodities changes from day to day, the value of the futures contract also fluctuates in terms of what the underlying commodity is actually worth in relation to the contract.

*How to analyze them: To analyze the value of a future's contract it can be a good idea to investigate the supply and demand of the underlying commodity being traded, broader economic conditions, daily, monthly and yearly price fluctuations and conditions affecting the particular industry. For example, if a hurricane is about to hit the Gulf of Mexico this could positively affect the price of oil futures.

*Benefits of Commodity Futures: Futures trading can be exciting and rewarding. The benefits of futures contracts can be great if the price of a commodity rises after the contract is purchased for a lower price. For example, suppose used cars are a commodity. Person A goes to dealership B to buy 10 used cars 1 month in the future for a special deal price of $15,000. After signing the contract a reputable antique automobile association declares the cars special antiques thereby increasing the market price of those cars and benefiting the buyer of the contract.