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• Stephen Cooper

How to trade commodity futures

The best way to effectively trade commodity futures.

What is a ‘commodity futures contract’? It is a contract that assures that the seller of the commodity will deliver the goods at a specified future date to the buyer. Both the buyer and the seller speculate to decide on the future price of the commodity. Though commodity futures trading first started decades earlier, but this has become popular only in the last 10 to 15 years. Today, the commodities that are traded in the futures market include wheat, tobacco, cocoa, copper, corn, eggs, gold, oil, lumber, soybeans, cotton and many others. Commodities futures are traded in order to profit from price changes, or provide cash flow to producers and shippers.

Here are the 2 basic types of people who trade in commodity futures.

Hedgers: A hedger is a producer of the commodity who trades a futures contract to protect himself from future price changes in his product.

Speculators: Speculators are independent floor traders and private investors. They invest in futures in the same way they might invest in stocks and shares, that is by buying at a low price and selling at a higher price.

There are hundreds of commodity futures exchanges that are spread across the world.

Demand for a particular commodity represents how much people are willing to purchase at various prices. Thus, demand is a relationship between price and quantity, with all other factors remaining constant. The relationship between price and quantity is negative. In other words, the higher is the price, the lower will be the quantity demanded for and, lower the price, the higher will be the quantity demanded for.

Market demand is affected by other variables in addition to price as well. These variables can be value added services like handling, packaging, location, quality control and financing.

Supply is another fundamental component of the commodity futures market. Supply characteristics relate to the behavior of firms in producing and selling of the goods.