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One of the many different types of investment options one can choose from is commodity futures trading. Commodity futures trading has gained popularity as a profitable investment option in recent years. There are different types of commodities like oil, gold, corn, wheat, which are traded through futures markets. Before making any investment in the commodity futures market, it is essential to understand the basics including the terms used in the trading of commodities.
Basically, futures trading means getting into contracts. The contract defines the terms and conditions for selling or buying a particular commodity at a specific price in the future. The quantity of the goods is fixed in the contract. Everything related to the actual delivery of the commodity is defined in the futures contract. There are also cash settlements against delivery of commodities for some futures contracts.
Trading in commodities is done through commodity exchanges using futures brokerage. This investment option presents a good way for investors to diversify their portfolio away from the usual bonds and stocks. It also limits the risk that would be there if all the investments were made in a single option.
Among the wide variety of commodities traded in the futures markets, oil futures stand out. Crude oil prices are volatile and depend on demand and supply. To trade profitably in this commodity, one needs to understand the basics of crude oil production and stay informed about news related to its availability and future supply.
Trading in corn futures involves contracts where the buyer agrees with the seller to take delivery of corn in a specified quantity, on a specified date, and at a specified price. There are several commodity exchanges where corn futures can be traded. Corn is traded on the CBOT (Chicago Board of Trade) in lot sizes of five thousand bushels or cents per bushel. Units of 50 tonnes are used for trading on the NYSE Euronext corn futures market.
Similar to corn, investors can trade in wheat futures through a commodities exchange. The buyer enters into a contract with the seller and agrees to take delivery of a specific quantity of wheat on a specified date and at a specified price. Wheat futures can also be traded on the NYSE Euronext or the CBOT. The prices of the contracts are quoted in cents per bushel and in dollars.
It was in Chicago, United States when a central dealing facility was established in 1878 that allowed dealers and farmers to trade commodity futures. Over the years, the systems associated with commodity markets have evolved substantially, allowing more people to trade. With technological advances in communications and real-time data transfer facilities in recent years, more people are able to trade the futures market online and from home. By agreeing to futures prices, an investor can deal with a wide variety of commodities and earn handsome profits.
To trade successfully, investors must be able to establish a relationship between the expected future price and the current price of a commodity. Also they need good information regarding the supply of the commodity which will affect its future price. Trading in commodity futures can be profitable if one follows the basics of investing and remains informed at all times.
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