Commodity Futures

As the stock market comes back to a state of relative stability, one that hasn’t been seen for several years, many of its former high-volume investors are seeking alternative ways to profit. The risks, a great deal of stress, and the instability of stock investments have made them a less favorable option for many investors, resulting in a greater amount of time and effort being spend on alternatives.

At the forefront of these alternatives is forex trading – the short and long-term trading of foreign currencies for, often large, returns. While the world of forex is equally as lucrative as some stock markets, it’s packed with the same issues. Currencies can be volatile, highly insecure, and just as stressful as a high-volume investment in risky stocks, causing headaches and financial nightmares.

There is an alternative, however, one that’s just as potentially lucrative yet significantly less of an awkward investment to managed as stocks. It’s commodity futures – contracts related to the sales and delivery of commodities such as wheat, energy, and other materials. It’s the basis of almost all major trades, and it’s something that investors can see lucrative profit margins and earnings from.

Before moving on to the commodities aspect of futures trading, let’s look at the basic structure of a futures contract. This will allow you to understand the nature of a futures contract investment, and see how they can result in a profit for investors. Once this is established, we’ll look at the different types of futures contract, and the commodities and financial instruments that can be tied to them.

A futures contract is, in simple terms, an agreement between a vendor and a customer, in which the vendor will sell a certain commodity or asset to the customer at a later date. Unlike most contracts, which are set in the here and now, a futures contract deals only with events that will occur at a later date, allowing people that purchase these contracts as investments to take advantage of price shifts.

The sale is outlined in the contract as taking place on a certain ‘delivery date’ – this is the date on which the contract will be completed and the delivery fulfilled. Unlike options contracts, that can have both the buyer and selling party negotiate for different fulfillment, a futures contract must be fulfilled according to the details of the contract with the seller delivering assets as agreed upon.

Now, let’s look at how this type of contract can relate to a commodity, and how it can become an investment opportunity. Futures contracts dictate that a trade will occur at a point in the future. A contract, for example, may relate to the delivery of a certain commodity or asset. For the sake of this example, we’ll use grain – a fairly common commodity – to illustrate a potential contract.

When the futures contract for grain delivery is placed on the market, the price of grain may be at a fairly modest level – it could, in fact, be at a low point. This allows investors that see an upcoming rise in grain prices to take advantage of this fact. By buying into the futures contract at this point in time, they can maximize their earnings when the contract is sold later with high grain prices higher.

In this case, the investor would make a tidy profit on their investment, assuming that the price of grain did in fact increase. Much like stock investments, futures contracts depend on activity in an individual commodity’s market to alter prices. When a commodity’s levels of demand and supply change, for example, it’s reflected in an increase or subsequent decrease in the commodity’s value.

This brings about events which can be lucrative opportunities for commodity futures investors. An otherwise in-demand commodity that’s experiencing a demand shortage and an oversupply issue is likely to trade at a value below what it previously did. This allows investors to jump on the contract at a lower rate than it usual, securing them for potentially large returns should supply decrease.

Then there’s the alternate situation, in which a massive level of demand is met with limited supply of a certain commodity. In this case, investors that own the futures contract to the sale are likely to see their returns hit quite high levels, as the market is willing to pay a greater price for the contract commodity due to the limited supply levels and the heightened level of demand for the commodity.

Commodity futures are traded on a futures exchange – a type of exchange that’s fairly similar to the stock and forex exchanges many of us are familiar with. Unlike stocks and currencies, however, it’s much more difficult to manipulate the commodities contract market. Values are subject to demand, supply, and other market forces, making it difficult for low-volume traders to have a major impact.

In many cases, investing in commodity futures can prove to be a smart and lucrative move. As with any financial investment, however, it’s a risky one. While smart investments in futures contracts are likely to return good results, poor timing can cause massive losses. Commodity futures are like any other investment – potentially very lucrative, yet risky for those without a detailed plan of action.

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