Trading commodities involves buying or selling futures contracts for a future delivery at a fixed price. These contracts usually involve the future delivery of a commodity of a physical, raw material. Frequently traded commodities include gold, silver, soybeans, and even sometimes live cattle and pigs. Futures market is a way for producers and consumers to participate in risk management, as they know and understand the risk involved of losing a lot of investments and leaving futures market with a lot less money than they arrived with.
Futures contracts are sold with the intention of a producer advising a guaranteed price of a commodity at that time. This decreases the risk in price deflation. For example, a farmer uses futures contracts as a way for a consumer to purchase future goods at the current desired price. If prices go down, the futures contract buyer is still required to pay the amount that was designated in the contract.
For investors, it is important to remember that commodities are sold on margin, and that only a portion of payment is required up front, which magnifies the potential profit and loss drastically. This goes to show how much money you can truly gain or lose once you have invested in a futures contract.
If you are wanting to trade commodities, you need to asses, know, and understand what exact commodity you want to trade, as well as your limitations to financial resources, as well as the absolute maximum amount of loss your investment could entail, and maximum profit. If you do not have a specific commodity you are looking to trade or invest in, there are other ways to keep your eye on the several different aspects of the many commodities that are featured in futures market.
The iPath Dow Jones-AIG Commodity Index Trust is one way to gain general exposure to all commodities available on the market, and is the recommended system of commodity availability by several wealth management firms in the market. iShares S&P GSCI Commodity-Indexed Trust is another system similar to the iPath Dow Jones-AIG Commodity Index, however, its components are a little different in how you filter different commodities available for investments and the rate at which you can invest. Aside from these two systems, you can also find other commodity indexes that are much more filtered and specifically geared toward one particular commidty. For example, the streetTracks Gold Shares index monitors solely gold commodities and investments.
No matter how you trade commodities and what commodities you invest in or trade with, it is most essential to know the risks that are involved with the drastic profit gain and loss you are up against when trading commodities in futures market.