Beginner Investing

Commodities and money markets

Commonly known as the futures market. This market enables you to purchase almost any commodity at the current market price and sell that commodity after a set time at the market price at that time.

Commodities include almost everything, metals, crops, foreign currency, meats etc.

For example if you could, with some certainty, predict the weather over the major grain growing areas of the world and knew that the harvest will be bad, then you may wish to invest in buying 10,000 tons of grain at today’s prices. Knowing that in six months time the price will soar due to shortages of gain and you can sell your 10,000 tons of grain at a hansom profit.

Of course the transaction is purely a paper one and there is no fear of someone delivering 10,000 tons of grain on your front lawn the next day.

Futures markets are predominately used by industry for hedge betting. For example a company has just won a large contract and knows that it will have to buy 10,000 tons of zinc in six months. The company may wish to purchase 10,000 tons of zinc from the futures market now for resale in six months. If in six months time the price of zinc increases 10% he will have to pay his zinc supplier the increased price. However he now sells his 10,000 tons of zinc purched in the futures market at the 10% increased price and he has now recouped the increased money he had to pay to his supplier. Of course the reverse applies if zinc goes down 10%. But either way the company has purchased the zinc at known prices without having to worry about rising prices during the six months.

This for obvious reasons is known as hedge betting.

There are individuals who do invest in this market for the sole reason of making profit. But these people are experienced in the commodity market and this is not an ideal market for the inexperienced investor. Whilst there are substantial profits to be made it is high risk and there are also substantial losses to be made.

If you would like to learn more about futures then we recommend you visit www.usafutes.com and click on the education sections. These give a very good insight into the workings of the futures market including advice, pitfalls and risks.