Futures vs. Commodities Dealing

Futures contracts and commodity dealing naturally go hand in hand, with futures being one of the most common ways to speculate on the price of commodities. Originally designed to facilitate commodities trading across the ancient civilisations, futures are inherently designed to help both commodity suppliers and buyers to reap mutual early advantage, tying in a future sale price today in order to make business planning and financial forecasting more feasible. But how does futures trading compare with commodities dealing as an investment strategy, and what advantages does it bring to the table when compared to trading in its rawest form?

Commodities are a natural choice for traders because there is a constant source of both supply and demand, and as a result prices are in a constant state of flux.  Manufacturers keep on manufacturing, while raw material providers keep on providing – there is a cyclical need for all commodities which drives the motions of commodity price movements. For the trader looking to make a profit on commodities, riding these price cycles makes it possible to reap a return on your money, but often the costs of storage, shipping and warehousing are prohibitive for smaller physically settled orders.

That’s where futures contracts come in.  Aside from being an ideal way to provide parties with early certainty on their business dealings, futures contracts also provide the ideal cash-settled environment for speculating on commodity prices.  There is no need for physical delivery, with most futures traders opting to accept the cash equivalent of their holding if they chose to sell at current market value, while the ability to leverage up transactions means the volatile nature of commodity prices are perfectly suited to this form of trading.

Unlike straight commodities dealing, where you would be required to source funding in order to obtain anything like the leverage with futures contracts, at exorbitant rates to match the levels of return possible, futures trading builds in the requirement for a fractional margin payment in respect of the larger transaction size – effectively, this allows a trader to buy thousands of pounds worth of commodity futures for as little as 5% margin, which in itself will entitle the bearer to possibly tens of thousands in underlying commodity.  Thus the potential for profit, and indeed loss, posed by leverage in futures contracts makes them highly lucrative for traders looking to make a return from commodity price movements.

Futures on commodities are probably preferable for most traders without the resources to store and handle the relevant goods. While prices do tend to fluctuate rapidly and in response to supply and demand, the benefits of a leveraged position on commodities which is ultimately cash settled makes trading on commodity prices more of a realistic option for ordinary traders and professional investment funds.

With the ability to leverage positions to a significant extent and thereby increase your notional trading clout, futures contracts delivers a higher reward, albeit complemented with a higher risk, that enables traders to make significant gains from their commodity price speculation.

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