In this video I'll discuss the fundamentals of commodities and futures investing.
A commodity is a term from the field of macro-economics and is academically defined as a raw economic good used in commerce that is fungible. Fungible simply means that the individual units of the raw good are interchangeable with no regard to who produced them. Some examples of fungible commodities include natural gas, copper, beef, and rice. As a counter-example, a television would be a non-commodity. You will likely know exactly what brand you want and will recognize distinct differences in price, quality, performance, and style between them. As such, TVs are not easily interchangeable.
There are two broad types of commodities: hard and soft. Hard commodities are mined or generated. Soft commodities are raised or grown. Furthermore, commodities are grouped into four broad categories: metals, energy, livestock, and agricultural. Now, how does something become a commodity? That happens through the process of commoditization. This occurs as certain goods or services that were once unique lose that uniqueness because everyone knows how to make, grow, or manufacture them. The first major exchange for farm commodities was the Chicago Board of Trade, or the CBOT, which opened up in 1848. It is the world’s oldest futures and options exchange and continues to trade wheat, corn, and livestock. Worldwide, commodities are a huge business, with some estimates placing the market at $20 Trillion dollars per year.
Since commodities are produced and traded on the global markets, their prices fluctuate with supply and demand. Because supply and demand changes frequently, commodity prices are often more volatile than the price of stocks, bonds, and other assets. These difficulties gave rise to futures contracts, as a method to lock in a price, smoothing the ups and downs of the commodities markets. Futures contracts, or just futures, are legal agreements to buy or sell something at a predetermined price and at a specified time in the future between two parties. When this agreement is executed, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date of the agreement. A small investor can bet on price movements of the underlying assets and thus speculate and invest in them.
Approach #1 is investing directly in the commodity. Approach #2 is using commodity futures contracts. Approach #3 is buying shares of Exchange-Traded Funds, or ETFs that specialize in commodities. Approach #4, is to buy shares of stock in companies that produce commodities.
Approach #1 is rarely done by small investors. Approach #2 and #3 is easily accomplished via standard ETF and stock investing. Approach #2 is the more complex one. Here you may want to open up an account with a specialized commodities futures broker, such as ADMIS, Advantage Futures, Daniels Trading, Infinity Futures, or RJO Futures. These are all Chicago based, and are what the dedicated futures traders use.
If you decide to go that route there are a number of things you need to know right off the bat. Number one is that commodities futures brokers require a minimum deposit to trade futures contracts. Number two is that a margin account is required to trade futures with all brokers. Number three is that you will need to quickly learn about pricing, market hours, and expiration. Number four, you need to realize that compared to the trading of equities, commodity futures are highly leveraged financial instruments. Once you start there are numerous strategies.
DISCLAIMER This video was created for informational and educational purposes only, and should not be construed as a source of specific investing, financial, accounting, or legal advice. This video should never be used as the sole source of information, without consulting with a financial or legal professional to determine what may be best for your individual needs. The creator of this video, Elliot J. Gindis, does not make any guarantee or other promise as to any results that may be obtained from using the information in the video. To the maximum extent permitted by law, the creator of this video disclaims any and all liability in the event that any information, commentary, analysis, opinions, advice, and/or recommendations contained in this video prove to be inaccurate, incomplete, or unreliable, or result in any financial or other losses.
