What is commodity futures and how they works?

Posted by Nayna Bhardwaj on October 3rd, 2017

Commodities can be defined as hard assets which ranges from wheat to gold and oil. Since, there are so many commodities hence they are grouped in three major categories. Which are agriculture, energy and metals. Commodities are traded worldwide, as it is used in our everyday life. Trading in commodities is quite risky. Hence, commodity traders prefer taking commodity tips to earn maximum returns on their invested capital.

Commodities futures are the agreements to buy or sell a raw material at a particular price in future on a specific date. The contract is for a set amount. The most popular food for futures are wheat and sugar. Most energy futures are for oil and gasoline. Metals which use futures include gold, silver and copper.

Buyers fix the price of the commodity they are purchasing by using futures contracts. The buyers usually buys food, energy and metal using futures contracts. Using the futures contracts reduces their risk that prices will go up. Sellers of these commodities use futures to guarantee that they will receive the agreed-upon price. By using this sellers removes the risk that the prices will drop. Because of this the prices of commodities change on a weekly or even daily basis. The price of contracts also changes, that's why the cost of gasoline and gold changes very often.

How they works?

If the price of the underlying commodity goes up, the buyer of the futures contract makes money. As he gets the product on agreed-upon price i.e, lower price and can now sell it at the today's higher market price. Moreover, if the price goes down, the futures seller makes money. As he can buy the commodity at today's lower market price, and sell it to the futures buyer at the higher and agreed-upon price.

In case the commodities traders had to deliver the product, few people would deliver it. Instead of this, they can fulfill the contract by delivering proof that the product is in the warehouse. They can also pay the difference in cash amount, or also by providing another contract at the market price.

To invest in commodities the traders should go with commodity funds, as it is the safest way to invest in commodities futures. The funds can be commodity exchange-traded funds or commodity mutual funds. Trading in commodity options and futures is very complicated. Before investing, you should know about the market current status because commodities prices are very volatile.

Trading in commodities is very profitable, however, it is very important for a trader to be updated with every single update of the market. And for this, a leading stock market advisory is a very good source for services and for getting information regarding market performance and trend.