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5 Risky Games That Investors Play

If you're willing to be patient, educate yourself or break out the elbow grease, you can get in position to make some big bets

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Commodity Futures

Commodity futures trading involves buying and selling contracts for the future delivery of physical raw materials. This includes metals like copper, grains like soybeans, energy goods like crude oil and even livestock. It’s important to note that you aren’t investing in the goods in a vacuum here, but the future delivery of those goods.

That’s why they’re called “futures” — because you’re trading the time element more than anything else.

For instance, futures are commonly used by farmers to ensure pricing down the road for their crops and thus mitigate risk. For the sake of argument, let’s say a farmer pays $1 for a contract that gives him the right (but not the obligation) to sell a bushel of corn for $10 next fall. If the price of corn drops significantly, he exercises his contract and protects against losses. But if corn skyrockets to above $10, then he allows the contract to expire unused and his $1 fee was merely the price of his peace of mind.

Where do you come in, then, if you are neither buying or selling corn? Well, you are the middleman on the futures contracts themselves.

Let’s say you buy that very same $1 contract to sell corn at $10 … but rather than worry about selling corn, you worry about selling that futures contract to someone who wants it. If corn drops to $5 a bushel, you can be darn sure farmers and other investors are going to be falling all over themselves to buy that contract from you for much more than $1.

The flip side, of course, is that corn goes to $20 and nobody on God’s green earth is at all interested in selling their corn for $10, so your $1 “investment” in that futures contract winds up being a 100% loss without any buyers to take it off your hands.

If you’re an options trader who is familiar with this concept of trading contracts more than the underlying securities or commodities, futures might be a decent fit. But be warned that run-of-the-mill brokerage accounts don’t offer commodity futures and that the amount of research and analysis on individual commodities is much more arcane — including weather patterns, mining output, supply chains and other issues.

Article printed from InvestorPlace Media,

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