HOW TO TRADE COMMODITIES

The commodities market is essentially a wholesale market. It is comprised of many common, household items but the difference is that trading these commodities is done in large bulk. For example, when you go to the grocery store to buy sugar, it is usually in five-pound bags. In the commodities market, you can buy sugar too, except that it is for 112,000 pounds! Here's another example. When you gas up your car or truck, you pay for gasoline by the gallon and maybe purchase 10 or 20 gallons. In the commodities market, you can also buy unleaded gasoline but the standard transaction size is much larger; 42,000 gallons! That's a lot of gasoline!
Because of the large size of these "wholesale" transactions, very few people ever trade commodities with the intention of actually using or consuming the item if they bought, or delivering the item if they sold. There's just too much of it! The great majority of commodity traders buy and sell only to profit from price movements. They are called speculators. And they are drawn to the commodities market in search of high-yield investing opportunities.
So what are some of these commodities? Well, the oldest and perhaps best known are the grains like corn and soybeans. Then there are the meats such as live cattle and yes, pork bellies. There are contracts on the energies such as crude oil and unleaded gasoline, and on precious metals such as gold and silver. The softs include cocoa, coffee, sugar, cotton and orange juice. Finally, there are financial products such as bond futures, equity index futures and currency futures. Any one of these markets can provide an opportunity when commodity trading.
In addition to the wide selection, there is another great advantage to commodity trading: You can sell before you buy. Most investors are comfortable with the typical investment pattern of buying first and selling later. While useful during a bull market, you typically just have to sit on the sidelines if prices are falling. In the commodities market, though, you can sell first and later buy back. Selling first is possible with commodities because when you sell a commodity contract, you're not required to deliver anything. Delivery is required only when the contract reaches expiration which may be weeks or months down the road. As long as you buy back the contract before its expiration, then you will cancel this obligation to deliver. And if prices have fallen in the interim so that you buy back at a lower price, then you have made money!
Perhaps the greatest appeal of commodity trading is high leverage. This means that to buy or sell a commodity having a contract value of say, $100,000, the commodity trader need only hold a small portion of this value in a commodity trading account, maybe $3,000 or so depending upon the contract. Because of leverage, the trader gets a big back for every buck. In the example above, a one percent change in the market value of the commodity contract would be equal to $1,000 or 33% of the margin. Leverage is what makes commodity trading risky and is described in greater detail in Understanding Commodities at right.