Commodities are goods such as corn, oil, gold, etc. The market for commodities is a zero sum game
(for every winner, there is a loser).
Commodities trading originated to offset risk. A farmer may choose to sell his corn today to
lock in $5.98/bushel for delivery in September.
A speculator believes corn will be more expensive in September and is
willing to buy September delivery corn for $5.98/bushel today.
Transacting commodities usually requires a dedicated
account. The Linn Group is one example
that covers non-commercial accounts.
Commodities are volatile.
Basically you put up a small amount of money to control a large amount
of a commodity. Continuing with the corn
example, a full corn contract is for 5,000 bushels. For September delivery that means $29,900
worth of corn. You can buy this corn
future by putting up $2,700. If before
September the price of corn goes up 20 cents/bushel, you can close your
position and pocket $1000. If the price
of corn goes down 20 cents/bushel, you will get a margin call as your contract
is worth $1000 less than you paid for it and the maintenance margin is
$2000. $2700-$1000=$1700. If you pay the $300, your contract will stay
open, otherwise it will be liquidated.
You can also do mini-futures contracts and options.
ETFs are a way to get commodities exposure and those are
bought and sold as stocks. There is much
less upside and downside risk.
Physical holding is another way. You could buy 10 tons of corn, 1000 barrels
of oil or more likely 100 oz of gold or silver.
The transaction costs and storage costs can be very high with
commodities. 100 oz of silver is worth
$2900. The silver needs to be stored
securely. An insurance policy for your
100 oz will cost about $30/year. Depending
on whether you want coins or bars, there will be some premium for that above
the spot price. Buying and selling will
typically have a 5% spread.
No comments:
Post a Comment