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With your computer, an internet connection, and some trading capital, trading commodity futures or options is another way to try to make some money. Almost everyone has some knowledge of commodities. There are futures contracts for corn, cattle, foreign currencies, gold, silver, interest rates, and even stock market averages to name a few. Margin accounts are available to those with a little capital and there is ample leverage offered by commodity futures contracts. Further, prices do fly around…extensively.
There are some disadvantages to trading commodities. Most commodity contracts come in a standard size that is often too large for the investor with less than $5000 in capital. Proper assessment of risk can be difficult for commodity traders. Markets trends change abruptly due to floods, droughts, heat, cold temperatures, wars, new discoveries, new theories and changing advice. Market surprises happen often and when they do, small fortunes can come and go…quickly!
Some commodities trade only during limited hours though most commodities now offer electronic trading. Furthermore, market fills on orders may be far worse than planned. In some cases, there may be a shortage of buyers or sellers, and it takes several days to get out of a position. Traders with market losses may end up with margin calls, as the market goes further against them when exiting the market.
In recent years there has been a new player in the commodity markets which makes many commodity markets riskier and more volatile. A massive amount of money has been invested in commodities via commodity index funds. Fund managers may decide that 5% of a billion dollar portfolio should be invested in commodities, and these commodities will be held for at least a year regardless of the price changes. If you, as a small speculator, have sold or shorted one contract of corn, for example, a few days prior to when the fund manager decides to buy 10,000 contracts, don’t expect to make money on your trade. You are like a very small fish going against the current in the whale lane.
So commodities offer speculative trading opportunities for both gains and losses, but because it is difficult to control the risk, they may not be ideal for the small investor. For that reason many commodity futures traders now trade commodity and or stock options. We will next take a look at options.