Commodities

Simply put, a commodity is food, metal, or another fixed physical substance.  In investing vernacular, a commodity is food, metal, or another fixed physical substance bought or sold for investment, usually via options or futures contracts. The trading of contracts for these items was also a way for farmers to manage the risks brought on by Mother Nature.

• An option is a contract that gives an investor the right, but not the obligation, to buy (or sell) a commodity at a specified price (Exercise price) from (or to) the Option seller within a specified time period. The purchaser hopes that the commodity price will go up by an amount greater than the cost of the option. If the commodity holds steady or moves in the opposite direction, the price paid for the option is lost.
• A futures contract is an agreement to buy or sell a commodity at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

Investing in commodities is not typically for the greenhorn investor but it can be instrumental in diversifying a portfolio.  Usually only the most seasoned investors trade in commodities.  Commodities can usually be purchased through stock brokers or through a commodities brokerage.  My suggestion is to go with an expert in the field--a commodities brokerage.  Larger commodity brokerages with bigger orders will likely attract the bigger (and better) floor brokers.  That means better and faster price fills for you.  The volume of futures and options for commodities far exceeds the value of the actual physical products purchased.   Commodities are most often bought and sold through commodity exchanges using options and futures contracts. 

Financial Guide Links

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