Commodity trading is fast becoming the weapon of choice for a growing number of people who want to earn big money from their investments. This is because commodities represent an ever- expanding list of products that may be traded, from metals and petroleum, to agricultural goods, to consumer products and even to certain financial instruments and currencies.
When compared with other trading avenues, commodity trading presents infinite options, which a first-time trader might find valuable and easy to understand.
Small traders initially trade on commodities like grains, meats and certain metals because they are have lower margins compared to the other products.
Experts say that first-timers should begin with a combination of around six to eight commodities during their initial attempts to ensure proper monitoring and to be on the safe side, as well. Commodity trading is usually tracked on a daily basis, so it's best that there are only a handful of eggs in your basket at the onset to get a feel of how the market works.
In fact, even the most expert traders opt to have just around 8 markets under their wing, because tracking too many markets that are moving at the same time eventually becomes a tedious task.
Traders are advised to avoid large range commodities because the risk of losing is greater with these products.
You may want to start with corn market, because its highs and lows are often predictable and you don't have to worry too much about high margins. Wheat is also a good first choice because it moves much in the same way as corn. In the meat market, cattle is a workable jump-off point, though some experts urge against it because it often leads to a pretty wide range.
Products will large ranges include soybeans, cotton and sugar. In the past, sugar was considered a low-margin good because you don't really risk much when you get into it.
However, current conditions in the market are not so favorable toward sugar and sugar-related goods anymore that it's best not to gamble too much into it.
The best way to invest in commodities is to trade futures. What you do is open an individual account, which can be access indirectly via a broker or directly through a futures commission merchant.
You can also engage in commodity trading via an account that is held by your chosen executor, by way of a written power of attorney. If you choose to take this path, you have to make sure this person is somebody you can trust because he will be making major financial decisions for you. If individual movement is not your type, you can share the load by joining commodity- related mutual funds and commodity pools, like limited partnerships.
Perhaps the best thing about learning to trade commodities is the fact that these low-margin markets, when combined with investments in the likes of stocks or bonds, are able to offset risks in your overall portfolio. This is not to say, however, that commodities do not come with major risks. Get the right information and trade wisely.