Stock Investing 101

Many terms are used when referring to the stock market. Some of the most confusing terms used are “futures” and “commodities”. Although they sound complicated, they are actually simple terms when you understand their meanings.

A commodity refers to tangible goods. To be a commodity, the actual item must physically exist. This might refer to everyday items such as oil, corn, soybeans and gold. Regardless of value, all physical items are referred to as commodities.

Does this mean a Wall Street mogul brings a barrel of beans to the table to get the best price for his goods? This would certainly be impractical although people traded wares this way in centuries gone by. While modern commodity traders do trade actual items, they relies on “futures” trading. This makes it easier to conduct trades on Wall Street without having the actual wares on hand. Futures trading involves potential crops that are traded by contract for the year ahead.

The commodity trading market has three different types of investors – commercial investors, large speculators and small speculators. Let’s consider the various investors and how they do business:

Commercial investors are large companies that trade in a certain commodity so they can produce a particular product. For example, many products can be made from a single corn crop. A large farm operation produces corn crops. The corn will be sold fresh, frozen, canned and as corn oil. Some of the crop will be made into feed for livestock such as cattle. From one singular commodity, several new products are made. Typically these different products are traded as separate stock forms for various parent corporations. A trained commodity trading expert will be able to made an educated guess about which crops will have a good year. The trader will also have an idea about which crops may fail based on production, climate and other conditions.

Large speculators put their money together to create the opportunity to purchase larger blocks of certain commodities to minimize their individual risk. A centralized money manager makes traders on behalf of large speculator groups. In many instance, this manager also makes financial decisions for the investors. The decision making control is in the hands of the centralized money manager. If the manager decides to diversity commodity trading, that is where the money will go. This puts the trading power in the hands of one person on behalf of the entire group.

Small speculators are a large group of investors. These individuals conduct commodity trading on their own or may act through a commodities trading broker. The commodity trading market can be influenced by both small and large speculators when they buy or sell large blocks of stock all at once. Even small speculators have plenty of power over the commodity trading market.

Much like any other kind of speculative trading, commodity trading involves learning about the market to gain a greater understanding about what is happening. Before engaging in commodity trading, do some research about commodities. Find out more about futures to make educated, solid decisions about commodity trading.

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