Commodity future trading began in the 1840s in the USA for Wheat and in 1875 in India for Cotton. Now in 2021, it is one of the most talked-about futures trading types, where speculators take advantage of price movements of commodities. The most popular commodities traded presently are
- Crude oil
- Natural gas
- Zinc
- Gold
- Silver
- Copper
Although fairly risky, there are many advantages of trading in Commodities Futures.
Here are the top advantages of Commodities Futures Trading:
Diversification
Having commodities futures as part of your portfolio helps with diversifying your risk and ensuring it is well balanced since commodities are an independent asset class. Commodities are not dependent on stocks; they are mostly raw materials used for finished goods.
Lower risk of Price Rigging
Since the price of commodities is governed by international price movements, there is a lesser chance of price manipulation. Also, with the advent of the electronic trading platform where investors trade with commodity account, the price is determined by the demand and supply of a large base of investors. This eliminates price manipulation by a few.
Lower Upfront Investment
In the Futures, you need to pay only a small percentage of the total trade volume as investment upfront. Investors need not put up the full amount at the time of making the trade. Therefore, even a small gain in price later could result in huge profits.
This percentage of money to be invested is lower for some commodities futures. So even if there is limited money for an investor, he can still invest a small amount in commodity futures compared to other futures.
Protection against price fluctuations
Using commodity futures, many exporters protect themselves against huge drops in price for exports when there are fluctuations in currency exchange rates. Similarly, many industrialists ensure the price of finished goods does not increase too much, by buying commodities futures at a lower price much in advance. So, any increase in the commodity price will not affect them since the price to buy the commodity at a future date was already fixed.
Commodity futures are for everyone
Commodity futures helps Speculators, Producers, and Consumers
- The producers want to lock in the price so they get the agreed-upon price and not lose money if the price falls drastically owing to some uncontrollable events such as wars, international export-import policy changes etc.
- Consumers want to ensure they do not end up paying too much and hedge against too much price increase in the future because of high demand.
- The speculators want to make a profit and ensure they get high returns on their investments based on the spot price of the commodity, basis, and the future price estimation based on analysis and trends. The speculators could make huge profits from the commodity’s futures without any actual buying or selling of the underlying commodity.
Summary
To sum up, commodity futures may be riskier at times, but it is definitely here to stay. Based on the advantages, an intelligent investor can make a huge profit by intelligently choosing the right commodity and the money at hand to invest.