Trading Commoditites And Futures: Back To The Days Of Trading Peas For Wheat
The stock market has many confusing terms, with “commodities” and “futures” being two of the most confusing. In the simplest definition of the term “commodity,” means actual, physical, tangible goods. Whether it refers to corn, soybeans, oil, or even gold, the actual physical item is referred to as a “commodity”. Of course, a commodity trader does not take a bushel barrel full of soybeans to the market looking for the best price for his wares, but the trade does consist of the actual crop. Within commodity trading, there is also “futures” trading, which involves the potential crops usually traded by contract for the following year.
Within the commodity trading market there are three types of investors: commercial investors, large speculators and small speculators. Commercial investors are the large companies that trade in a certain commodity to make a product- say for instance, the dozens of products that can be developed from corn. A large farm operation will produce corn that will be sold fresh, canned, frozen, as corn oil or used as feedlot food for cattle and other livestock. That single commodity has suddenly become several new products, usually traded as separate stock forms for different parent companies. The commodity-trading expert has a good idea about which crop will have a good year, and which ones might falter based on weather, production and other considerations.
Large speculators pool money to enable themselves the opportunity to buy larger blocks of a certain commodity, and to reduce their individual risks. Large speculator groups use a centralized money manager who actually make the trades, and in most cases, make the financial decisions for the investors as well. If the speculator’s money manager decides to diversity into commodity futures trading, that is what they will do.
The third group is the small speculators. These are individuals who do commodity trading on their own or through a broker. Small speculators or large speculator groups can greatly influence a commodity trading market by buying or selling large blocks of stocks at one time.
Futures trading in Commodities is about having the right season, but it is a lot more about having knowledge. To be a successful futures trader you must know a bit about the crop you deal with, the climate in the area that you are dealing with, and the predicted weather patterns for the growing season. There is no sense in investing a ton of money in corn, for instance, if a low season is expected because of repeated flooding. Know that futures trading is a risky venture, even under the best conditions, and that even if you look carefully at every factor, there are twists of fate that nobody can predict or prepare for. What if there is an infestation of parasites in the crop you just sunk your life savings into? Not only will that farmer not make contract, you will have just lost all of your trade capital to boot.
Futures trading is wisely best left to the bigger traders and the speculators to deal with. Venture capital is becoming harder and harder to come by, and losing once in the futures market can spell the end of a trading career. It is hard to face, but sometimes it is better to stay out of the game then it is to lose your entire financial standings because of a freak storm or other tragedy.
If you insist on commodity futures trading despite all of these pitfalls then you must keep in mind that diversification could be the key to keeping your head above water when everyone else is sinking. Don’t put all of your eggs in one basket. Don’t sink all of your money solely in corn for instance, if there is a chance that corn will perform badly this season. Split your trades between corn and soybeans evenly, or at a percentage that will allow you some degree of comfort if one of those should happen to falter on the open market.
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