Investing in raw materials: basic concepts

Are you interested in entering into an agreement to invest in raw materials? Many prefer to invest in commodities, which is this type of deal. Here you buy or sell financial instruments, currencies or physical commodities. This agreement can be for one of two things. Some choose to use it to buy a futures contract, while others opt for an option on futures. Since both are legally binding and standardized, delivery of the merchandise will be requested at a specific date, time, and price.

This type of investment is very popular in London, Japan and the United States. When you trade futures exchanges, you will be working with a clearing house. This ensures that each and every trade is completed following the rules and regulations of the market. Once a trade has been placed, this same clearinghouse will come in and function as a buyer or seller on each side of the trade. Investors feel safe using this strategy as all exchanges are regulated. The regulation is supervised by the country in which the negotiation takes place. The Commodity Futures Trading Commission is the regulatory body for the United States.

Initially created to help commodity producers such as farmers, these markets help keep price volatility in check in each industry. By using a commodity market, a producer locks in a price for the commodity being traded when it hits the market. By doing so, the producer has less risk that the price will fall unexpectedly and hurt him. All trading is done using electronic trading platforms as well as the open clamor method. To trade on the floor of the exchange, a broker or company must be a member of the exchange. Exchange members can trade with their personal accounts or can perform this service for others. If you do it for others, members of the exchange (who are authorized brokers in most cases) receive fees and commissions.

Unlike many other investment strategies, those who trade commodities are advised to trade on both the long and short sides. Some prefer to do both using the strategy known as “spread.” This type of investor will buy a contract and sell a related one in the hope of profiting from the price difference. Only you can decide which method is preferred for you.