Commodity futures are a popular investment vehicle for those looking to speculate on the price of a specific commodity. They can be complex, so it’s vital to understand the basics before getting involved. Commodity futures are contracts that let investors buy or sell a specific commodity at a set price on a future date. The contract buyer is committed to buying the commodity at the set price, while the seller is obligated to sell it. Futures contracts are standardized and traded on exchanges like any other type of securities. The most common use for commodity futures is hedging purposes. Or, an energy company may want to lock in prices for oil and gas supplies over some time to lessen its risk. Like stocks and bonds, commodity CFDs futures can also be used as vehicles for speculation. For example, if you think wheat is going up, you might buy a wheat futures contract hoping to make money when the contract expires.
Essential Factors To Consider When Trading Commodity Futures
When trading commodity futures, a few key factors must be kept in mind.
- One of the most important is understanding the underlying asset. For example, when trading gold futures, you buy the right to receive an ounce of gold at a future date. The underlying asset is always worth more than the settlement price (the price at which the contract is settled).
- Another critical factor to consider when trading commodity futures is market volatility. When volatile markets are active, traders may be more willing to take risks and make moves that could lead to losses. However, when markets are less volatile, traders may be more likely to hold positions and see smaller gains or losses.
- Finally, it’s essential to understand what type of contract you are trading.
Facts About Commodity Futures That You Need To Know
- Commodity futures are contracts between two parties that agree to buy or sell a particular commodity at a predetermined price on a future date or in the future.
- The buyer of a commodity futures contract is contractually obligated to buy the underlying commodity at the agreed-upon price on the specified future date or later. The commodity futures contract’s seller is obligated to sell the underlying commodity at the agreed-upon price on the specified future date or earlier.
- A critical difference between commodities and stocks is that commodities are not subject to stockholder approval, dividends, or other forms of corporate governance. This gives investors more freedom to speculate on prices without worrying about day-to-day operational issues affecting their investments.
- Futures contracts also offer hedging benefits, which allow traders to protect against potential losses by committing themselves to sell an asset if its value rises and buying an asset if its value falls.
- Commodity futures are regulated by the Commodity Futures Trading Commission (CFTC) and are considered to be more volatile than other financial products.
- The price of a commodity futures contract is determined by supply and demand in the underlying market and various other factors, including political and economic conditions.
- Commodity futures are essential tools traders and investors use to make informed investment decisions.
You need to know many things about commodity CFDs futures to make intelligent investment decisions. As always, be sure to do your research before making any investments, and remember that there is no one-size-fits-all answer when it comes to commodity futures – what matters most is finding the right strategy for you.
