(Q)
Even though I am not futures trader myself – I have been trading stocks exclusively – I go here now and then and enjoy reading a lot of posters. What I particularly like about this place is that nobody forces their opinions or their specific methodology on you. Refreshing. And being a stock trader – and I am sensitive to this – I haven’t found any post hyping commodities over stock trading. Refreshing again. Even no hyping commodities as such, no pie in the sky. I can even read that trading is pretty risky and not for everyone. Seems like a fair site. My question is this: should I start thinking about commodity trading, which main difference will I encounter from my stock-trading „experience“? Thanx, Nickolai
(A)
The main difference will be Nickolai, you will be losing in commodities, not in stocks, LOL. Just teasing dude. Welcome on board, and take us easy!
Well you said it right Nick, trading is NOT for everyone. TRADING is not an investment per se and it is not suitable for all people at all times, thats certainly true. However, I firmly believe that futures & options trading should be considered by any serious investor – even the very conservative one.
One of the differences that comes to mind is leverage Nick. In the stock market, each dollar invested gains control of two bucks worth of stock if you buy on margin, right? Well, in futures, each $1 you put up can control $10 or even more worth of underlying commodity.
A small example; today you can control 5,000 bushels of soybeans with a total value of over $25,000 for a margin deposit of mere $1,000. Should you buy 1 contract of the critter this Tuesday at the open and sell the same day on the close (Sept, when market jumped 23.5 pts), you would have made $1,175 in one lousy day, that being over a 100% return! See what I mean? Damn, not true! That would be a daytrade, and as such you would be required to put up only one third of the normal margin – you would have made well over 300%! My gosh!
These kind of moves – and even bigger ones – occur all the time in commodity markets. Now you may be able to get such spectacular returns in other investment areas as well, but few can match the liquidity offered by futures & options markets.
But remember a point that I cannot emphasize too much: Where the reward is great, so is the risk. No trader can be right all the time, and it may take only one mistake to wipe out a dozen winning trades. The benefit of leverage is its promise of big returns, but that is also its greatest danger.
Another thing – in commodity markets , its easy to sell as it is to buy. Typically, an investor thinks he has to buy and prices have to go up in order for him to make money. However, in futures markets, you can profit from dropping prices by going short. And no waiting for an uptick boy.
And yet another thing – in commodities you have less to watch. You can invest in thousands of individual companies in the stock market, each of which may go their own way regardless of the general stock market trend. But rather than watching 50 groups of stocks with dozens of individual stocks in each group, commodity trader has less than a dozen major groups to monitor, and he can follow nearly every significant economic area by watching less than two dozen major commodities.
And you know what Nick, if the trader is stocks-freak, he can still trade the whole stock market or parts of it with stock indexes contracts without the trouble of having to trace a number of individual stocks.
And last but not least; you as a commodity trader will have much better access to information about your area of interest than do investors in other areas. Dozens of government and private reports are released to the public daily for nearly every commodity. You can get a pretty good idea about price prospects for some major commodities yourself by just being alert, for example, to weather conditions in key growing areas or to changes in interest rates at your local bank. Most of the major daily information as they are released real time can be tracked from our hubsite, have you noticed?
Generally information on commodities is not limited to boardroom decisions and personalities and insider knowledge, but is relatively easy to get. Yes, there is often a premium on getting information early to position yourself in commodities, but even a novice trader in these markets can do much research on his own quite cheaply.
Enough said.
Good trades to all.
Tom out for now.