HOW COMMODITYTRADING DIFFERS FROM STOCK TRADING

Rob Hall

 HOW COMMODITYTRADING DIFFERS FROM STOCK TRADING
 by Rob Hall
 
 There are major differences between trading stocks and trading
 futures. While stories of fortunes made or lost overnight on the
 futures markets are largely untrue, the futures trader, if using a
 sound trading system, can usually make more money on the futures
 market and make it much faster. However, if that trading system
 is not sound the trader can have greater losses.
 
 This is because futures contracts are highly leveraged. Margins
 (the deposit required) on futures contracts are much less than for
 stocks, as low as 3% on some futures contracts compared with up
 to 50% for stocks. As well, futures investors are not charged
 interest on the difference between the margin and the full contract
 value.
 
 The margins for futures contracts act more as a performance bond or good faith deposit whereas the margin for stocks is more of a loan.
 
 Although the margin on futures contracts is quite small, it rides the
 full value of the underlying contract as that contract rises or falls,
 thus providing the leverage mentioned earlier.
 
 Commissions charged by futures brokerages are normally much less
 than brokerage commissions for other investments.
 
 Futures markets use the open outcry (auction type) method of
 trading ensuring very public, fair, and efficient markets. Plus, it is
 much harder to trade on inside information as so many variables
 affect the markets. Also, futures markets are very liquid. Transactions
 can be completed quickly, which lowers the risk of adverse market moves
 
 If you own stocks you are an owner of the company. This allows you
 to share in the companys profits, and losses, through dividends, and
 increases or decreases in the stocks value. It also gives you certain
 voting rights with the company. However, a company can go bankrupt,
 leaving you holding worthless stock.
 
 When you buy and sell futures you are only entering into a contract and
 dont really own anything. What you have is an agreement to buy a
 commodity or financial instrument (wheat or Treasury Bonds for example)
 at a specified price at a certain date in the future.
 
 The person on the other side of the transaction has agreed to sell you
 that commodity or financial instrument at that specified price by the
 specified date. If you sell a futures contract prior to that date you have
 offset your position and have either a profit or loss on the trade.
 
 The stock you bought 3 years ago is the same stock you can buy today.
 Futures contracts, on the other hand, have very limited lives. They are
 traded in a regular series of contract months referred to as delivery months.
 
 Futures contracts have expiration dates after which no further trading
 for that month can take place. The September corn contract you traded last year is not the September corn contract you are trading this year. In fact last Septembers corn contract no longer exists.
 
 Many futures contract months of the same commodity trade simultaneously
 on the market, sometimes even years into the future. The current contract
 is called the front month and the other contracts are called the back months. They are called back months even though they are for future months.
 
 For example, corn trades for the months of January, March, May, July,
 September, November and December. Suppose todays date is August 4, 2000.
 
 The current contract month for corn would be September 2000 and so is
 called the front month. The months of November and December 2000,
 January 2001, March 2001, May 2001 and July 2001 are back months even
 though they are in the future and even flow into the next year.
 (This may sound confusing but its not ...really)
 
 All of these months can be traded at the same time although most of the
 trading activity takes place in the front month.
 
 When the current month expires the next contract month becomes the
 front month and so on.
 
 
 
 
 
 
 

Rob Hall is a successful futures trader, President & CEO of his own investment
firm, and international author. His books on learning to trade futures markets
are distributed through Sumas International Sales Ltd. View them at
http://www.futuresopps.com/Commodities.htm

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