The Concept of Commodity Credit : WIKIHOW In order for you to start making an investment in commodities, you should have a brief idea of…
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What Are Future Contracts
Future contracts are basically one of the best ways for you to trade commodities and it is only suitable for those who are willing to take risk as this is one of the riskiest ways of owning a commodity. This kind of commodities purchasing is highly recommended only for advanced investors and traders. Future contracts refer to the agreement which has set a specific time in the future to make or take delivery at an agreed price. Let’s take a standard contract for oil which is around 1200 barrels. You may enter a contract to purchase 1200 barrel at a cost of $50 per barrel which will be worth $60 000. If the price later increase to $55 per barrel then you are going to make a profit of $5 per barrel You could send it to gain profit.
Risks of Future Contracts
As what has been mentioned before, the future contracts are very risky and it is not recommended for those who just starting to learn to trade without extensive research. It involves buying something known as margin which means that you only need to pay just a small portion out of the value of the contract. Then, how about the rest of the value of the contract? The rest being borrowed. Based on the previous example, you would need to pay only around 25% of the total value of the contract. You are going to make a profit from this when you sell the oil. How much profit you make, let’s say 50%, is also going to be how much you could lose. The lose is only if the price is going down. However, for some cases, you may require to put up more than 25% of initial payment. This is all depend on your broker and how the investment is made. Besides that, futures also have a higher rate of commissions. Due to this fact, you are required to have a well-developed strategy and knowledge so that you can make your trade well.
Purchasing Futures Contracts
By having knowledge and information, you can use futures as a trade for commodity that you are interested in. The first thing is to find a broker that offers futures trading and then you can proceed with your plan. Generally, brokers that offer ETFs and mutual funds will have this option of futures trading available. Ask them about it and if they really offer it you can follow these steps:
- Select the type of commodity that you wish to purchase. Next, set the month that you wish for the contract to expire as well as the number of contracts that you are going to purchase.
- For example, you want to buy a contract dated 17 August 2017 crude oil contract. The available price is $45 per barrel. You can see that most brokers will have drop-down menus that offer a variety of dates, amounts and what types of commodities that are available. So, what you should do now? Just simply select the options that you prefer and then just click buy.
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Commodities are the basis or the raw materials in producing or making other products. There are a few fields which the commodities are profitable. A few examples of the fields are agricultural, metals and energy. For agricultural, we have wheat, corn, and soy where in each field, there are many commodities that have long been used as trading. For metals, we have gold, silver, and copper while for energy, we have crude oil, natural gas and heating oil. Across the globe, every producers have come into a consensus of the basic grades for the commodity which is known as the basic grades. These basic grades enable the commodities to be interchangeable. Besides, with the presence of these basic grades give each and every type of commodity a value that can fluctuate with the global market’s movement. The investment arises due to this movement where people start to have money trading commodities and commodity securities. There are many things to understand for you to start investing in commodity but worry not since in this article, you are going to learn the best way to invest in the commodity which is very simple and easy to follow. Let’s get started.
1 . Find Out The Amount For Your Investment
You are basically are going to directly jump into the market without knowing your capital. How much are you going to spend? That should be the first thing on your mind before you are going to start investing. You need to be aware that commodities market are one of the high-risk investments since its large gains are balanced by large potential losses too. However, since the fluctuations are uncorrelated with others, it can reduce overall risk.
2 . Get Yourself A Brokerage Account
To start trading in commodities or any other securities, you need to seek help from the stockbroker to create an account for you. This account is used to hold and trade securities. However, if you are going for investment in physical commodities such as buying and storing gold on your own, you don’t have to get yourself a brokerage account.
3 . Deposit Money Into Your Brokerage Account
This is your first investment so how much money you should deposit? It is all up to you. My only advice here is that you should take the lowest risk by putting in a small sum of money first. This commodities market is basically alien to you. It is unknown and still mysterious. You still don’t have enough idea on how it works with you. The best way for you is to slowly and gradually build up your position in the commodities market after you have known the flow of the fluctuations and how it works.
That is basically how to invest in commodity. As with other investment plans, the most important thing for you to remember is that you need to ensure that before you start to invest, you should have enough saving or your emergency fund as you need to be prepared for any unexpected things such as job loss, illness, accident and other. You should have around a year or two funds for expenses before you start your investment. You should also set aside the fund for your living expenses and other things that you are paying monthly for the next 3 to 5 years.