Unlike stocks and bonds, commodities are actual raw materials or agricultural goods. Commodities include wheat, corn, crude oil, gold, copper, and other goods and materials. When investors buy and sell commodities, they are not buying and selling ownership stakes in companies; instead they are buying and selling the actual goods and materials themselves.
Investors have many answers to the question of how to buy and sell commodities. There are many options to consider, but one of the most popular options is through futures contracts. These instruments are agreements to buy or sell a particular commodity at a set future date. Much like bonds, they can be bought and sold before the maturity date with impunity as the price of the underlying commodity goes up or down.
Futures traders make a profit with commodities by selling contracts that are decreasing in value and buying contracts that are increasing in value. This sounds simple, but futures contracts are incredibly complex, especially when they involve commodities. This is because futures traders need to be aware of the various geopolitical and economic events and trends that can affect the prices of commodity futures.
Take oil futures, for instance. The 2003 Iraq War was the starting point for an incredible boom in commodity oil prices that matched the housing bubble, both of which burst in 2008. Initially, traders were concerned that the war would drive oil prices down. For a while, the war did drive oil prices down but in late 2003 they suddenly reversed course and began to climb considerably.
Futures contracts are not linked to other kinds of derivations, such as securities backed by a mortgage for investment property. During the 2008 meltdown, the futures market did take a hit; projections showed a potential 30% drop in price ranges across all asset classes. The catastrophe has largely been recovered from, however, and commodity futures look better than ever.
Photo by PocketAces **Cortesy of sxc.hu
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