An upsurge of interest in commodity investing is driving the development of investment instruments that accommodate the needs of investors looking for exposure to commodity prices. Historically, direct exposure to the commodity market has been seen as complicated and often too costly for the average investor. However, there are now instruments that offer investors easy, inexpensive access to commodity price movements. This section will explore the different instruments available to investors, and discuss commonly held paradigms about their advantages and disadvantages. This discussion is intended to provide the average investor with more complete and detailed information about the instruments well before they invest in the commodity market.,
¶ … Investment Instruments
An upsurge of The recent increasing interest in commodity investing is has driving en the development of investment instruments that accommodate the needs ofavailable for investors looking for exposure to commodity prices. Historically, direct exposure to the commodity market has been seen as complicated and often too costlyexpensive for the average investor. However, there are now instruments that offer investors a cheap and easy, inexpensive access to directly exposure to commodity price movements.
This section will explore This part will look more into the different instruments available to investors, and discuss commonly held paradigms about their advantages and disadvantages. This discussion is intended e purpose is to providegive the average investor with more complete and detailed better information about of the instruments well available, before they investing in the commodity market. In this paper, Sseven instruments are discussed in this paper, as follows: Futures contracts, stocks, options, exchange traded funds (ETFs), exchange traded notes (ETNs), commodity mutual funds, e-commodities, and contract for a difference (CFDs).
Futures contracts
Futures contracts are standardized agreementscontracts between two parties to buy or sell an underlying asset or commodity at a predetermined price at a specified particular point in the future when the contract matures (Bodie, et al.Kane and Marcus, 2011). That the contracts are standardized signifies that they are subject to the same terms for all trades. Standardization results in, as a result, traders always knowing what rights and obligations arise from the contracts (Bode, et al.Kane and Marcus, 2011). The standardization also makes it possible to price futures contracts in a futures market thereby enabling so that they may be subject to continuous trading.
It is important to note the differences between futures contracts and forward contracts. The primary differences between the two types of contracts are standardization and exchange-based trading. Forward contracts are made according to the needs of the customers since they are exchanged directly between buyers and sellers. As such, forward contracts are not standardized. Even though future trades are more constrained than forward trades, futures contracts standardization tends to stimulate the futures market and enhance liquidity. Futures contracts occur differ from forward contracts, in regards to not having direct contact with the other party entering the contract but instead through an intermediary, called a Clearinghouse, and . Another difference from the forward contracts is that futures contracts are settled daily on the basis of changes in closing prices the previous day before. Gains and losses are then charged to on both contract holders' account at the end of each day in what is . This account is called a margin account. AOne can at any time within the term of the contract, cancel the contract can be cancelled and receive a final settlement is distributed to the contract holder. If a trader believes there will be a coming rise in the market will soon rise, a long (buy) position will be taken. When the market is expected to decline, traders will whereas a belief in declining market in the future, takes a short (sell) position. Futures are typically bought on a margin -- usually 5-10% of the underlying value -- which makes futures a high-risk investment fFor speculators., futures can be extremely risky due to the fact that futures typically are bought on a margin, typically 5-10% of the underlying value. In other words, investors leverage their capital by trading can trade a much larger amount of the commodity for less than capital than the market value of the traded commodityneeded. As a result of the leverage, profit or losses will be multiplied (for example, 10 times, when using a margin of 10%, the resultant profit or loss is multiplied 10 times). Futures are available for almost all types of commodities. The NYMEX has been described as the largest commodity futures exchange in the world (CME Group, 2012). Speculating in the futures markets is a strong investment can definitely be an excellent form, of investment, but even with margins, buying futures contracts requires a large amount of capital for to effective speculation. e effectively on the futures markets.
Because of high risk and the high price of contracts, futures may be more appropriate for professional traders.
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