Commodity Trading – Chapter 4: Using Commodity Trading as an Investment Vehicle

This is chapter number 4 out of 13. Read the rest:

Read Commodity Trading – Chapter 1: History of Commodity Trading
Read Commodity Trading – Chapter 2: Commodities Trading
Read Commodity Trading – Chapter 3: What is traded?

There are lots of intrinsic advantages of using commodity futures as an investment vehicle when compared to other investment options like equities, bonds, real estate, collectibles and saving accounts.

The main attraction though, is the possibility for large profits in the short term. Futures trading is extremely profitable because of something called leverage.

Say for example, with only $5,000 in your Futures trading account, you are able to get involved with an S&P 500 stock index Futures contract. However, if you are planning to buy the equivalent amount of common stocks ie. actually own a percentage of the company, you would need around 35 times as much, meaning $ 175,000.

Let’s assume that you predict the stock market is bullish ie a market where prices are going up and stocks are gaining in value. You can either buy $175,000 worth of individual stocks corresponding to the S&P index, or you can purchase a single S&P futures contract. This is because buying a Futures contract is equivalent to laying a bet that the S&P index will go up.

Another plus point about Futures trading is that the commission chargeable is relatively lower than buying stocks. The commission for a $20,000 worth of Futures trading profit is only around $30 to $50.  Whereas the commission rate applicable for equities is normally 1% for buying as well as selling.

Even though you can make a substantial profit in commodity trading, it is also difficult to constantly be able to make the right investment decision regarding when to buy or sell.

Over liquid investments like real estate or collectibles, commodity speculation has a crucial advantage. You will always have access to the balance in your account. Provided that you maintain a sufficient margin, it is even possible to use the balance in the account on another trade without liquidating your current position. With regards to equities, bond or real estate, you cannot utilize your gains unless you liquidate your investments.

 Actually commodity trading is not complex at all. When compared to the stock market which has literally thousands of stocks and funds, the Futures market has only around 40 feasible markets to trade in. These markets pretty much cover the whole expanse of markets sectors in the commercial world. It also means it’s much easier to follow the specific index, or metal of your choice for instance.

It is relatively straight forward to sell (Going Short) or to buy (Going Long) in Futures trading. You just need to decide correctly if prices are going to go up or down. As such if you trade with a diversified portfolio, the potential from realizing profits from any economic scenario exist. Irrespective if we are going through a period of inflation, recession or natural disasters, you always have the opportunity to realize profits from trading in commodities. 

Read Commodity Trading – Chapter 5: Advantages of commodity trading
Read Commodity Trading – Chapter 6: Disadvantages of commodity trading
Read Commodity Trading – Chapter 7: Risks of Commodities Trading
Read Commodity Trading – Chapter 8: Risk Management
Read Commodity Trading – Chapter 9: Steps To Undertake While Trading In Commodity
Read Commodity Trading – Chapter 10: Commodity Trading – a losers Game?
Read Commodity Trading – Chapter 11: Learning to Trade Commodities
Read Commodity Trading – Chapter 12: Creating a Trading Plan
Read Commodity Trading – Chapter 13: Stress of Commodity Trading