Commodities Investing

Written by Jacey Harmon
Bookmark and Share

Commodities trading and investing has been around for over a thousand years. Futures, the tool for commodities investing, have been traced as far back as ancient Greece and Rome. In the 15th century, London, Brussels, and Amsterdam were major trading centers with a broad spectrum of commodities being traded. Modern futures trading, however, essentially began when the Illinois State Legislature created the Chicago Board of Trade (CBOT).

By 1865 the CBOT had adopted rules that standardized many of the specifics of a futures contract: delivery, margin, and terms of payments. As the futures market grew, so did the number of players involved in the market. The trading public started to switch from those who had an underlying interest in the traded commodity, to those who were just trying to profit from price swings. These "speculators" were wiling to take on price risk in exchange for profits. The introduction and subsequent growth of speculators in the marketplace was the foundation for commodities trading today.

Trading Commodity Futures Contracts

The CBOT, Chicago Mercantile Exchange (CME), and New York Mercantile Exchange (NYMEX) are the epicenters for commodities futures trading in America. Each exchange has its own specialty for futures trading. The NYMEX specializes in energy and metals futures while the CME trades stock, financial, agricultural contracts. In many instances, there will be similar contracts traded on different exchanges.

Each commodity futures contract will have its own specifications. These specifications are essential to valuing a contract and understanding contracts are quoted. The exchange where the contract trades will have the specs readily available for examination. It is very important to become well educated in the futures markets before ever placing a trade. Futures are very risky and losses can be financially and emotionally devastating. Studies have shown that over 80 percent of those who trade futures lose. Futures are very risky due to the high leverage capabilities and large contract values. A trader can control a $100,000 contract with just a few thousand dollars invested. This leverage dramatically increases profit potential but it equally increases potential for loss.

Bookmark and Share