We Know: What are Commodities and Futures?

What is a commodity futures contract?

A futures contract is a legally binding agreement between two parties to buy or sell in the future, on a particular exchange, a specific amount of a commodity at a specific price. The buyer and seller of a futures contract agree now on a price for a product to be delivered, or paid, on a settlement date.

What is an option on a commodities future?

An option on a commodity futures contract is a legally binding agreement that gives the buyer, the right, within a specific period, to exercise his option to buy.

How do I go about trading futures or option contracts?

In the United States, futures contracts and options on futures contracts must be executed on or subject to the rules of a commodity exchange. Individuals cannot trade directly on an exchange. A person or firm must be registered with the Commodity Futures Trading Commission to trade on your behalf.

What are the different ways to trade commodities and futures?

There are two categories of accounts through which you may trade.

  • Individual Account: In an individual account, trading is done only for you. An individual account may be a "non-discretionary" account, which means that you make all the trading decisions and the broker may not execute any transactions without your prior approval. In a "discretionary" individual account, you give permission for the firm carrying your account or some third party to make trading decisions on your behalf.
  • Commodity Pool: You may also trade commodities through a "commodity pool. In a commodity pool, you are purchasing a share or interest in the pool, and trades are executed for the pool, rather than for the individuals who have interests in the pool. Pool participants share ratably in gains or losses.

Should I consider trading commodities and futures?

Trading commodity futures and options is not for everyone. It is a volatile, complex, and risky business. Before you invest any money in futures or option contracts, you should:

  • Consider your financial experience, goals, and financial resources and know how much you can afford to lose beyond your initial payment.
  • Understand commodity futures, option contracts, and your obligations before entering into those contracts.
  • Understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you.
  • Know whom to contact if you have a problem or question.

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