Commodities Futures

Commodity futures aim to transfer risks associated with the ownership of a commodity. The commodity may be anything, from wheat to a foreigncurrency. At the time of the futures contract, the actual commodities do not physically change hands. The contract is legally binding for the transfer of commodities at a future date, which is specified at the time of entering into the contract. Also, at that moment itself, the price at which the delivery would take place in the future, is decided.

How are Commodity Futures Traded?

Commodity futures trading are done in an organized futures market. Unlike other investments such as stocks and bonds, trading in futures does not involve the actual possession of the commodity. All an investor does is to speculate on the future direction of the price of that commodity.

A well organized and efficient commodities futures market is acknowledged as helpful for the price discovery of commodities that are traded in it. Such a market facilitates the offsetting of transactions without actually impacting the physical goods.

When commodity futures contracts are traded with high leverage, they fall in the high risk area and get close to speculation. However, such kind of trading can also be done using low leverage to provide favorable payoffs. This technique would place futures trading in the low risk spectrum.

Benefits of Commodity Futures

· Through commodity futures trading, it is possible for investors to make huge profits with limited capital. Sometimes it happens even in a short period of time.

· Due to its features, the commodity futures market attracts hedgers since they can minimize their risks. The market also encourages competition among the traders who have the market information and price judgment.

Commodity Futures: Risks Involved

Often, some investors trade in commodity futures to get rich quickly. Such investors are prone to losing money as they take big risks which might go against them. Trading in commodity futures is risky if it is treated as merely a speculative market. It is advisable for investors to exercise patience while making investing decisions.