Commodity Market investment management

FOR IMMEDIATE RELEASE
Artesia, California, United States of America (Free-Press-Release.com) February 15, 2012 -- Everyone is familiar with commodity products since they are apparent in day to day life, which includes: beef, corn, soy beans, orange juice, etc. These basic commodities are traded on markets, very similar to where stocks are traded, for investors to participate. However, investors usually enlist the services of investment management companies because of the more complex nature of these markets.

Why are the commodities markets more complex than stock markets? Commodity futures.In these markets you buy and sell futures contracts instead of stocks, which are all leveraged. A futures contract is bought with a down payment with the intent of taking delivery of the commodity in a specific month. For example, you could buy a 2012 December Corn contract. When the contract expires in December you either need to offset the contract by selling it on the market or you take delivery of the commodity and pay the remaining balance on the contract. Those who have no intent to take delivery are speculators. They buy and sell futures contracts with sole intent of getting a return on their investment.

On the other hand commodity producers (e.g. farmers) use the commodity markets for the hedging. To be a true hedger with commodity futures you have to actually own or plan on using a commodity. If the hedger likes the current price of corn, for example, and plans on selling a crop in December, he can get an investment service to sell (a.k.a. short) a December Corn contract. This will lock in the current selling price of corn so the farmer is not susceptible to price fluctuations. However, hedgers do need to monitor the basis. The basis is equal to the cash price of a commodity minus the futures price of a commodity. In a normal market the basis is negative because futures contracts have a carrying charge, which includes storage, interest, and insurance for the product. Note that transportation is not included in the carrying charge.
So why exactly do investment services pay close attention to the basis for hedgers? Let’s say a manufacturer needs platinum to make a product and they like the current price. They will buy the futures contract to that corresponds to when the material is needed to lock in the cost. In between the time of the purchase and the contract expiration the cash price increases faster than the futures price. If they would have paid for the material in cash it would have been worth more in relation to the futures contract.

One final note is on margin calls. Because all futures contracts are leveraged in commodity markets there is a potential for big losses. Since only approximately 30% is needed for an initial margin it is possible that the futures prices falls so much that commodity future is negative net value for the investor. If this happens, the investor must deposit more money to return the value to positive or liquidate enough assets to offset the balance.
There is a lot to consider when investing in the commodities markets. There can be big potential for profits but also can be just as devastating for losses. It is important to pick an investment management service that is proven and trustworthy.
*Past performance is not indicative of future results. Futures and options trading involves risk of loss and is not suitable for all investors.

www.pinnaclecommoditygroup.com

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