|Commodity||Average Daily Volume (ADV)||Open Interest|
|Crude Oil (WTI)||687,479||2,187,168|
|Henry Hub Natural Gas Future||466,455||1,233,792|
|Chicago SRW Wheat Future||134,676||357,978|
Economists often place commodities into three broad categories: energy, agriculture, and metals.
As with any asset class that experiences regular price volatility, there is an opportunity for investors to trade and profit from the ever-changing prices; there is also the very real danger of making a loss to account for. Even the most experienced and knowledgeable traders can experience losses when trading commodities due to the often-unpredictable nature of the price movements. It is widely agreed that trading commodities carries a greater amount of risk than conventional assets, including stocks and bonds.
As discussed above, commodities rise and fall in value based on supply and demand. The factors which impact supply and demand change on a daily basis meaning that what could be considered a good investment on a particular day, may indeed change quickly. Commodity trading is not often considered a ‘buy and hold’ play, as the greatest rewards are normally reaped on a short-term basis. As a result, commodity trading is rarely advisable for retail investors. That is not to say that commodities have no value for retail investors; on the contrary. But the dangers of day-trading in the commodity market are often considered too risky.
The commodities market operates in the same way as any other financial market. The most common way for traders to buy and sell commodities is by buying and selling futures contracts.
There are a variety of ways that individuals/retail investors can invest in commodities. Investors can purchase the physical commodity; this is most common with precious metals, for example, gold. Investors can purchase an ETF which tracks the price of futures contracts; the majority of major fund houses will offer ETFs for commodities. Investors who believe the price of a commodity will increase can purchase an ETF. Investors can also choose to enter structured products which pay quarterly coupons based on the price of commodities. These are advantageous for investors looking for a pre-defined income/return. Click here for details on how to open a structured products trading account.
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