How to Invest in Commodities

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.

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.

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.