In this video, we will understand investing in commodities through futures contract.

In this video, we will understand investing in commodities through futures contract.

Now, here firstly we will understand what Commodities Futures are?

Commodities futures are an agreement between the buyer and the seller to deal in an underlying asset at a pre-determined price and date.
The underlying asset that is dealt here are basically commodities like wheat, gold, crude oil, industrial metals etc.

In the case of commodities futures contract, if the price of the commodity rises, then the buyer of the futures makes the profit.
The buyer makes profit as the price that was agreed upon at the time of entering in the contract is lower than the current market price, which results in gain for the buyer.

On the other hand, if the prices fall, then the seller gains, as seller can buy the raw material at a lower price and sell it to the buyer at the agreed pre-determined price.
So basically, this concept states that:

If the price goes up – Buyer gains
If the price falls – Seller gains

Now, let’s discuss investing in commodities futures.

Globally two most popular ways of investing in commodities are through Exchange Traded Funds (ETFs) and commodity Derivatives.
The best part of investing in Commodities ETFs is that it offers to invest in the commodities without owning any commodity directly and taking the advantage of the gains that dealing in commodity market offers.

So you, as an investor can take the advantage of the performance of the underlying raw material in commodities through investing in the stocks of the companies who are directly engaged in commodity.

One of the advantages of investing in these kinds of ETFs is that instead of purchasing several futures contract separately, an investor need to pay for a single trade at the given price. This will save the time and additional costs involved in buying individual contracts separately.

However, the derivatives market is relatively new, and it is an expert field of trading.

Thorough research is required to step foot into the market.

For example, if you want to trade in crude oil futures, you will first have to study about the entirety of the crude oil markets.
You will have to understand all price movements, and the factors affecting it.

If not, you will inevitably end up making losses.

Therefore, before you invest, be sure to research properly and understand all complexities of commodities and futures.