The Wild Investor on "A Trader's First Book on Commodities"
In the financial world, commodities refer to some tangible product where the supply fluctuates based on usage and/or seasonal conditions.
If weather conditions look to damage the supply of oranges, then the price of orange future contracts will rise.
Popular commodities include that of grain, wheat, and other agriculture crops. Oil and metals are also other form of commodities. Commodities can be traded through future contracts.
To get a better understanding of how commodities trading started, take a quick look at this excerpt from A Trader’s First Book on Commodities.
…the grain supply would dwindle to create shortages. This annual cycle of extreme oversupplies and subsequent undersupplies created inefficient price discovery and led to hardships for both producers and consumers.
The feast-or-famine cycle created circumstances in which farmers were forced to sell their goods at a large discount when supplies were high, but consumers were required to pay a large premium during times of tight supplies. Luckily, a few of the grain traders put their heads and resources together to develop a solution…an organized exchange now known as the Chicago Board of Trade.
Today there are much more advanced and in-depth methods to trade commodities, but the idea stays the same.
Whereas stock trading relies on the performance of individual companies, commodity trading is based on the status of specific items. Essentially traders buy contracts that represent an amount of the given quantity.
For example, the Chicago Board of Trade says one wheat contract is worth 5,000 bushels. If the supply of wheat looks to be decreasing, then that could raise the price of those contracts. Demand must still be there.
Obviously the above is just a simple example of what to expect in commodity trading. There are several other benefits and methods to taking advantage of this type of trading. Even if you are not trading commodities, understanding what contracts are being bought and sold can help you determine the status of a certain commodity which could ultimately effect individual stocks.
To learn more about commodity trading and related strategies, I recommend checking out A Trader’s First Book on Commodities: An Introduction to The World’s Fastest Growing Market.
The author of this book, Carley Garner, draws on her extensive experience teaching traders, shows how to calculate profit, loss, and risk in commodities, and choose the best brokerage firm, service level, data sources, and market access for your needs.
You will find specific guidance on accessing commodity markets cost-effectively, avoiding common beginners’ mistakes, and improving the odds of successful, profitable trades.
Garner demystifies the industry’s colorful language, helps you clearly understand what you’re buying and selling, and walks you through the entire trading process. She concludes with a refreshingly new look at topics such as trading plans, handling margin calls, and even maintaining emotional stability as a trader.
Overall A Trader’s First Book on Commodities is a great and easy read for traders of all experience looking to get familiar with commodity trading.
Final scene from the movie Trading Places where the crop report is shared…
This text is courtesy of www.AWildInvestor.com