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Investing In Commodity Futures

Investing In Commodity Futures

When you think about investing, you may not automatically consider commodity futures. But this type of investment can be a great way to protect yourself against inflation and volatility in the stock market, according to Bill Schantz. Before you decide whether or not to invest in commodities, it’s important to understand the pros and cons of this type of investment. Let’s take a closer look at some of the pros and cons of investing in commodity futures.

Investing in Commodity Futures

Commodity futures are agreements to buy or sell a specific quantity of a commodity at a specified price and date in the future. These contracts are standardized by exchange and can be traded on margin, meaning that investors can control large positions with relatively little capital.

Futures can be used for speculation or hedging, says Bill Schantz. Speculators seek to profit from changes in the price of the underlying commodity, while hedgers use futures to lock in prices for physical commodities they intend to purchase or sell in the future.

Investors interested in commodity futures should have a good understanding of the factors that drive the prices of specific commodities, as well as the mechanics of how futures contracts work.

The first step is to choose an exchange-traded commodity futures contract that meets your investment objectives. Then, you’ll need to open a brokerage account and deposit margin money. Once your account is funded, you can place trades through your broker.

When buying a commodity futures contract, you are entering into an agreement to purchase a specific quantity of the underlying commodity at a specified price on a specified date in the future. If the price of the commodity rises above the futures price, you will make a profit; if it falls below, you will incur a loss.

To close out your position, you simply enter into an offsetting transaction at any time prior to the expiration date of the contract. For example, if you bought a corn futures contract at $3 per bushel and the price of corn rises to $3.50, you could enter into an offsetting transaction to sell the contract at that price, locking in a profit of $0.50 per bushel.

If, on the other hand, the price of corn falls to $2.50, you would enter into an offsetting transaction to buy the contract back at that price, incurring a loss of $0.50 per bushel.

The key thing to remember is that futures contracts are not investments in themselves but rather are tools that can be used to speculate on or hedge against future price movements in the underlying commodity.

When used correctly, commodity futures can be an effective way to manage risk and potentially make profits, according to Bill Schantz. However, they can also result in losses, so it’s important to understand how they work before entering into any transactions.

The Concluding Thoughts

Futures contracts are a way to invest in the price of commodities like oil, gold, and corn. By buying a futures contract, you agree to buy or sell a certain quantity of a commodity at a specific price on a future date. The price of the contract is based on the current market price of the commodity, so if the market price goes up, your contract becomes more valuable. Conversely, if the market price falls, your contract is worth less. Trading in commodity futures can be risky, says Bill Schantz, but also potentially profitable if done correctly. It’s important to do your research before investing and to work with a reputable broker who can guide you through the process.

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