Commodities are an important part of everyday life, whether related to food, metals and energy. They can also be a good way for an investor to diversify beyond the tradition of stocks and bonds or to take advantage of price trends. There are several ways to invest in commodities, some of whom have been easy for the average investor. A futures contract or options for the future gives a popular way to invest in commodities.
A futures contract is an agreement to buy or sell a specified quantity of a commodity at a specified price in the future. Such contracts are available with commodities like oil, gold and natural gas. They can also be purchased for agricultural products such as cattle or grain.
Many involved in the futures markets are commercial or institutional users of the commodities, they actually trade. They can then use these markets to take a position that reduces the risk of financial loss when a price change occurs. People who choose to participate, are speculators hoping to profit from the price of the futures contract. They usually choose to close their positions before the contract is due, and thus do not accept actual delivery of the product.
If you decide to invest in a futures contract or the upcoming election, you must open a brokerage commission account if your broker does not trade futures. You will also be required to complete a form acknowledging your understanding of the risks associated with this trade. The contract for each commodity requires a minimum deposit that varies with each product. Of the deposit amount will depend on the mediator and the value of your account will either increase or decrease the contract value. If the contract value decreases, you will be subject to a margin call and will then need to put more money in the account to keep the post open. Because of the enormous amounts of leverage, you can receive high returns or suffering large losses from small movements in price. This means a futures account can literally double or be wiped out in just a few minutes.
Most futures contracts are options associated with them. These futures options you can still invest in futures contracts, but minimize any losses you may incur for the option's cost. Since options are derivative financial instruments, they usually do not move point to point with the futures contract.
However, there are advantages to buying futures. One is that the influence that they allow for large gains for those who are on the right side of the trade. Another is the minimum deposit account control full-size contracts an individual investor would not normally be unable to pay.
Before you invest in a futures contract, make sure you understand the risks involved. Also know that there are significant benefits, as mentioned above, which can make them very lucrative contracts for you.
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