How to Invest in Commodities

The majority of the time you’ll be reading from tables that contain at three letter code for example FCF. FC stands for Feeder Cattle the last F stand for the month that the contact expires.

Here are the standard symbols used for each month by most exchanges:

F – January

G - February

H – March

J - April

K – may

M – June

N – July

Q – August

U – September

V – October

X – November

Z – December

Often times you will see commodities listed in the month/year/commodity/exchange format

Commodity exchanges are known by different codes below you’ll find a list of the various codes in the exchanges:

CBOT Chicago Board of trade

CME Chicago Mercantile exchange

COMEX commodities exchange center

CSC coffee, sugar, cocoa exchange

FINEX financial instrument exchange

IMM international money market

NYC New York cotton exchange

NYFE New York futures exchange

NYMEX New York Mercantile exchange

Investor’s business daily is an excellent newspaper for watching the futures market. Price is the major statistic generated by the futures markets. Trading volume and number of outstanding contracts or open interest are also important as well.

Table investors business daily

Season Open

High Low Interest Open High Low Close Chg

CORN (CBOT) - 5,000 bu minimum- cents per bushel

299.50 196.00 Dec 98 4,273 216.50 216.75 212.75 213.00 - 2.75

305.00 209.50 Mar 99 172,538 223.25 225.00 220.25 220.75 - 2.50

299.00 217.00 May 99 46,167 230.50 232.00 227.75 228.00 - 2.50

312.00 223.50 Jul 99 52,360 237.00 238.00 234.00 234.25 - 2.00

280.00 232.00 Sep 99 10,489 241.75 243.25 240.75 240.75 - 1.25

291.50 238.00 Dec 99 26,434 247.25 248.00 246.00 246.25 - 0.75

Est. Vol. 54,000 Vol. 33,210 open int 316,483 - 21

The first and second lines at the top of the table read as follows:

Season high and the low referred to the highest and lowest prices recorded for each contract from the first day was recorded until the present.

Open interest — – is the number of outstanding contracts for each maturity month. Many sources do not include this information.

Opening price or the open — – is the price for a range of prices for the day’s first trades.

High — – if the highest price at which the commodity was sold during the day.

Low – is the lowest price of the commodity was sold during the day

Close – is the last price I was traded before the exchange ended trading for that day. Sometimes this is referred to as the settlement price or settle. This is the price the clearinghouses used to determine margin requirements for its members.

Chg (change) – this is the change between the previous day’s close in the current day’s close.

Estimated volume — – is the estimated volume of trading for that day this is measured in number of contracts traded.

Volume — – is the actual trading volume that was measured by the exchange that day.

Open interest — – is the total open interest for all contracts months combined at the end of the day’s trading session is the total number of contracts that are available.

An Example:

Corn (CBOT) 5,000 bu; cents per bu. This line means that the table applies to the Chicago Board of Trade (CBOT) Corn contract; the contract size is 5,000 bushels; and the prices shown in the table are in units of cents per bushel. Thus, 263.00 (two hundred sixty three cents) means $2.63 per bushel.

First notice day – is the first day that a notice of intention to accept delivery of the actual commodity will be made. This state is established by the exchange and in general is the date you want to avoid if you have a long position you want to offset your position by one to two weeks before the date if possible. Although it is possible to sell your contract after this date there are often many fees associated with this.

Last trading day – to this is when all trading ceases for this particular contract if you have a short position is not closed by the state it will be settled by actual delivery of a commodity to you. Once again, this is a date that you would like to avoid. Ideally, you want to get out of your position one to two weeks before the state.

A futures contract is a legally binding commitment made to a futures exchange; the contract describes the quantity and quality of the commodity to be delivered at a specific month in the future and at a price agreed upon at the time the commitment is made. Each future contract specifies a date at which this transaction must occur this is known as the settlement date the specifics of how the transaction will be fulfilled the called the delivery. Less than 3% of futures contracts traded each year result in delivery. Usually most speculators offset their contracts before the contract expires.

There are many types of orders and you can place in the market below are some of the most commonly used orders and we will use these to get you started.

Open order. This is an order there remains in force until it is filled or canceled by you or the underlying contract expires. This order is also known as a good – till – canceled order (GTC).

Date order. This order will cancel at the end of the day unless it is filled usually this type of order is the default order used on most trading platforms.

Market order. This is an order to buy or sell a futures contract immediately at whatever that market price is at the time of the order. Traders on the floor love these orders as they can make a nice profit from these orders because they will fill these orders as the price changes. This form of order is the fastest order you can make.

Limit order. This is an order to buy or sell a futures contract at a specific price or condition. For example, b December 2009 at 17.10 or below. These orders allow for better positioning and technical trading.

Stop order. This is in order to buy or sell a futures contract if the price moves to price you specify when the market price reaches your specified price is order becomes a market order. For example, buy stop one December silver contract at $17.10

Stop-Loss. This order is very similar to stop order except that is meant to offset an existing order. This order specifies to the broker that once your prices hit to close out your position and get you out of the market. This form of order allows you to manage risk. Beware just because you have a stop-loss order doesn’t mean that your order will be filled at a price you specify. Often, when markets are very volatile your stop-loss may sell off your position at a lower price than you have specified.

There are two possible positions that you can take in the market. You can either go long or short. To go long means that you believe the price of the commodity will increase and you buy a futures contract of that commodity. This position is held by traders who expect that sometime in the future you can offset the contract at a higher price and make a profit from the transaction. This is considered a bullish position meeting you expect the price to rise.

Going short means you are expecting the price of the commodity to fall and so you sell a futures contract of that commodity. With this trade you are expecting that in the future you can offset the contract at a lower price and profit from the price decrease. Investors who make this trade are considered bearish because they believe the price will decrease in the future.

Every exchange requires the market participants to keep a certain amount of money in the account that controls the contracts this amount of money is known as margin it represents a bond that provides against losses from controlling the contract. Because margin is a bond you can think of it as a deposit meeting it is a requirement to control the contract and will be returned to you when you complete the transaction. When trading commodities, is a zero sum game meaning that at the end of every trading day all accounts are settled that day. All profits are deposited into your account and all losses are withdrawn from your account. When you close out a transaction with a profit your margin deposit plus to profit goes into trading account. If your account balance falls below the maintenance amount you receive a margin call, a call from your broker to deposit additional funds to maintain your position in the market. These margins are taken very seriously by brokers because the exchange collects the margin directly from each of the clearinghouses for which the brokers work.

As with many subjects there is a learning curve that you have to pass in order to understand the commodities market. Whenever you see a word you don’t understand use the glossary and look it up. When people say that they buy or sell a commodity or a future what they mean is that they were buying or selling a contract that controls an underlying commodity. For example, a contract for silver controls 5000 ounces of physical silver. These contracts are arranged by date for example there would be a contract for December 2009 silver what this means is the contract expires in December of 2009. The contracts also specify whether you will make delivery or take delivery of the underlying commodity. Some contracts allow you to take delivery of the underlying commodity others only allow you to sell the actual contract. The majority of speculators and never intend to take delivery and instead transfer their contractual obligation to someone else in the marketplace when this happens this is called offsetting your position. And as a speculator this is exactly what you want you will keep all the profits or losses from trading the contract however you will not have to take or make delivery of the underlying commodity.

Trading stocks or equities you must usually buy the full amount of the stock at best you can expect a 50% margin. With stocks you are investing in shares of a company the price of the shares his based almost solely on earnings reported by the company. As the market has seen in the last few years these earnings are heavily manipulated by the company and are difficult to decipher by even the best accountants. Secondly, when trading commodities you are trading a physical good or asset — – it’s something real. When trading stocks you’re buying and selling shares of a company a legal entity these things are abstract and they’re not real. In the stock market are over 50,000 companies to evaluate versus the commodity market their less than 50 commodities to review.

Trading commodities requires diligence and study, don’t expect to sit down at your computer and trade successfully without putting in the time. It’ll take you time to learn how to trade will take the time to learn how to analyze but in the end you will have a business that will make you money from anywhere in the world. The more you read and the more you study about commodity investing the better you’ll be and the more money you will make.

There are a few good reasons to trade commodities. Firstly trading commodities is a business. This business deals with buying and selling of basic non-expendable items that are required for survival. When trading commodity futures you are trading with elements that are required by all people of all nations. Food, water, oil basic necessities that affect everyone’s life. The market and the exchanges on which to trade have been there for many years and will continue to be there for many years longer.

This business which you have when you trade commodities is just between you and the marketplace no boss, is no middlemen, it’s just you and your trades are responsible for profit or loss that day. Furthermore, your business is free in many ways you have no product, you have no overhead, no employees – most of the headache of running a business is taken away when you trade commodities.

The strongest reason for trading commodities is the high financial leverage commodity trading offers. What this means, is that for a small investment you’re able to reap very large profits. For example a $1620 investment allows you to control a silver futures contract for 5000 ounces of silver.. That means for that relatively small investment price you are controlling $85,000 worth of silver. This leverage is perhaps the most powerful tool there is in the investment world. When your trades are right you able to make huge amounts of profit from very small amounts of investment. However, leverage goes both ways and there is always the potential for you to lose your investment at an alarming rate. That being said, using the right strategies thorough research and a focus on the fundamentals of investing one can minimize the risks of trading commodities while maximizing profits.