The forex trading market is the largest market available today and most of the financial liquidity happens in the forex market. For example, the forex market has an average traded value of USD $2,000 billion daily. This amount in US dollars makes this market even larger than the stock market itself. As an investor, you should definitely consider the forex trade market, as it is the one that offers most profitable trading opportunities one in the world. The unique trait about the forex market is that there is no central headquarters or marketplace for currency trading, but it is conducted electronically – all transactions are made through computer networks between investors around the world.
Forex market is open for traders who want to invest and make money all day long, five days a week, and currencies are being traded almost everywhere in the world. There is risk and gain in this kind of market, however, and you can see a good return on investment if you are already well versed with FX trading. Nevertheless, there are multiple reasons why you should invest in currencies trading, so keep reading for more.
#1 The Size Of The Market
As we were discussing earlier, the forex trade market is, at this point, the largest one in the world. This certainly gives investors and traders great chances to make good profit and earn some money while they play this investing game. There is no other market as big as forex right now, so this would be the first reason why you would want to invest in it. If you are also curious about this investment market and you have only looked at it from the margin, it’s time to go in and start playing.
#2 The Accessibility Of The Market
The second reason why you would want to invest in the forex market is the accessibility. This market, unlike any other investment market, is open all day long and it doesn’t require you to wait for institutions to open to be able to trade. Also, you can easily trade currencies from your pajamas any time of the day. This makes Forex a simple to access market, and basic to use by any retail trader. Today, with the internet we have at hand and the constant access to it from everywhere we are, it is even easier to trade on forex market from our own home.
#3 The Equality Of The Market
Being a direct result of its size, the equality of the market is a huge benefit for anyone looking to invest in it. Given the enormous size of this trading market, no institution or individual can affect it by purpose or control it by purpose. Therefore, the market keeps everyone on the same level, as it cannot be manipulated. If you are an investor, this is probably one of the main reasons why you should go ahead and invest in the FX market.
#4 The Leverage Of The Market
The fourth reason why the forex market is a market worthy to invest in is the leverage. Since this market has unique characteristics compared to other markets, the leverage is better for investors. As you do not need a large sum of money to trade a large sum of currency, you get a minimum of 100:1 leverage from the forex brokers today when you make an investment.
#5 The Volatility Of The Market
The forex market is always dynamic, on the move, and very volatile. The market is always making large movements, as large transactions and high liquidity is being in transaction every day. This is a great news for investors who want to play on a dynamic market that can increase their profits with a little bit of risk. For example, volatility for most of the liquid stocks is between 60 and 100, while volatility for currency trading is 500, which is a very attractive feature for people who want to make easy and quick profits.
#6 The Profitability Of The Market
There is a huge amount of potential profit on the forex trading market, which is another unique trait of this particular market. The best thing about the forex trading is that you can make a profit regardless of the direction the market is going in. As opposed to the stock market, the forex market allows you to profit both when the value of your stock is going up or down. In the stock market, you only see a profit if the stock you own sees an increase. The forex trading is a two-way street, so you must be always working in pairs – do not forget that you always have the possibility to make a profit on Forex.
#7 The Transparency Of The Market
This is another huge advantage to consider when entering the forex trading market. To invest in a market with a high level of transparency is a good step forward, and that is why you should consider trading in the forex market. Simply, with this market, what you see is exactly what you get and there will be no surprises. All you have to do is analyze the news, look at the numbers, and read the charts. If you do all that, you will have no surprises with your investments. After a while, if you know what you are doing, you will be able to accurately predict the market direction.
So, these are the main reasons why forex trading market is a good option for any investor, but the decision whether to invest or not always belongs to you. Before you enter the forex world, it is advised that you carefully read all these advantages and compare them to the markets you know. The truth is, there is no other market as beneficial, transparent and profitable as the forex trade market and every investor should, at least, try to exchange currencies. Once you go forex, you will probably want to stay on this market and keep investing.
(as an additional note by us at TransFS, if you are interested in Forex trading, then check out our Forex trading page for more information, and information on some of the best trading paltforms)
Two years ago, Bank of America/Merrill Lynch released its findings of a 90-year analysis comparing growth and value stocks. While the report showed that value stocks have handily outperformed growth stocks on an annual basis (17% versus 12.6%), the tables have turned over the past decade, with the low interest-rate environment providing an extra boost to growth stocks. Given the recent market swoon, certain growth stocks may be ripe for the picking.
With this in mind, we asked three of our fool.com contributors to name one growth stock they believe investors should consider buying right now. Making the list were cancer-focused drug developer Exelixis (NASDAQ:EXEL), software-as-a-service provider to the wellness industry Mindbody (NASDAQ:MB), and payment solutions provider Square (NYSE:SQ).
A 30% compound annual sales growth rate through 2021? Yes, please
In recent months, Exelixis stock has been pressured on the idea that Bristol-Myers Squibb and its immunotherapy combo of Opdivo and Yervoy would eat into the company’s market share in first-line renal cell carcinoma (RCC). It surprised a lot of folks on Wall Street just how well Bristol-Myers’ combo therapy did in first-line RCC.
However, many of these fears have proven overblown — at least so far. In Exelixis’ most recent quarterly report, the company recorded 69% net product sales growth, which was driven almost entirely by Cabometyx. For those who may not recall, Cabometyx was the first drug to deliver the “trifecta” in second-line RCC of a statistically significant improvement in median overall survival, progression-free survival, and objective response rate. Having beaten Bristol-Myers to pharmacy shelves in first-line RCC, it doesn’t appear that Cabometyx will cede much of its market share.
Exelixis’ lead drug is also less than two months away from an expected label expansion into advanced hepatocellular carcinoma (HCC). The HCC market is a bit smaller than RCC, but it nevertheless should give Exelixis an opportunity to grow sales and profitability after Cabometyx easily met its primary endpoint in the phase 3 Celestial trial.
Ultimately, we’re talking about a biotech company capable of a compound annual growth rate of 30% through 2021 that, if its share price were to remain stagnant, would be valued at just 10 times projected 2021 earnings per share. It’s not often that a company can be considered both a growth and value stock, but that’s exactly what investors get with Exelixis.
High growth at a value price
Brian Feroldi (Mindbody): Yoga has become an increasingly popular exercise in America. Meeting the demand has turned into a very big business. The North America Studio Alliance estimated that spending on activities related to yoga grew from $10.3 billion in 2012 to $16.8 billion in 2016. The popularity of the fitness program has caused scores of small studios to pop up everywhere.
A hidden winner in the yoga boom is a software-as-a-service business called Mindbody, which provides its customers with all of the tools that they need to run a successful operation. Tasks such as scheduling, marketing, and payments can all be handled through Mindbody’s platform in a cost-effective manner.
The allure of Mindbody’s offering has already convinced more than 68,000 customers to sign up. That number might sound big, but the company is already looking beyond yoga and has started to target the larger fitness and beauty industries. The company estimates that there are more than 300,000 potential customers in its target markets, so the opportunity ahead is still substantial. What’s more, Mindbody has a history of introducing new tools that convince its existing customers to spend more on the platform.
Mindbody should be able to continue to grow its revenue at a greater than 20% rate for the foreseeable future as it continues to win new customers and roll out new features. Meanwhile, Mindbody’s stock has been heading in reverse in part because of the marketwide sell-off. With shares currently trading more than 40% below their 52-week high, I think right now is a great time to buy this growth stock at a value price.
Reaping rewards from the revolution
Keith Speights (Square): You could focus on the short term. If you do, the departure of Square’s CFO to become CEO of NextDoor might worry you. Square’s lower-than-expected Q4 earnings guidance could be concerning as well. So could the stock’s steep valuation. Even after a significant pullback, Square’s shares still trade at a whopping 94 times expected earnings. But investors should focus on the long term.
We’re in the midst of a financial revolution as society transitions away from cash to digital payments. Square is positioned as a key player in this revolution. Customers love the ease of use of its products and how easy Square is to work with as a company. This makes Square an attractive partner to go to for other products and services. And the company is rapidly adding them to its lineup.
Square thinks that it has tapped less than 3% of the addressable market in the U.S. The company should be able to capture more of this market by selling more products and services to existing customers, moving upmarket to larger customers, and making strategic acquisitions.
Even better, though, the global market is at least six times larger than the U.S. market. This gives Square a tremendous opportunity for growth. With momentum already picking up in Australia, Canada, Japan, and the United Kingdom — and more markets to come — Square looks like a great long-term growth stock.
Brian Feroldi owns shares of Mindbody and Square. Keith Speights owns shares of Square. Sean Williams owns shares of Bank of America and Exelixis. The Motley Fool owns shares of and recommends Exelixis and Square. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool recommends Mindbody. The Motley Fool has a disclosure policy.
Bitcoin fell sharply over the Thanksgiving weekend, dragging the wider cryptocurrency market down with it, including ripple (XRP) and ethereum’s ether, as last week’s huge sell-0ff surged back destroying hopes the bitcoin market had found a floor.
The bitcoin price dropped to a low of $3,604 according to CoinDesk’s bitcoin price tracker, before rebounding back over the psychological $4,000 mark. The bitcoin price is currently hovering around $4,000 on the Luxembourg-based Bitstamp exchange, as the volatility seen throughout November continues to cause chaos for traders, investors, and exchanges.
The bitcoin price is now off some 80% from highs of almost $20,000 late last year, while other major cryptocurrencies ripple (XRP) and ethereum are down by similar amounts. Bitcoin has lost some 40% of its value in just two weeks of November, the worst bitcoin price drop since April 2013.
Ripple, the common name for the XRP digital token, has held up better than most over November’s sell-off, boosted by deals it continues to ink with the traditional financial services industry to provider cheap and speedy cross-border transactions.
Ripple recorded significant falls over the weekend, however,
Despite many bitcoin faithful arguing bitcoin is merely on discount for Cyber Monday today ahead of a so-called Santa rally (which traditionally sees stocks around the world move high in the run-up to Christmas), others are losing faith in the future of bitcoin and cryptocurrencies as this year’s $700 billion rout tightens its grip.
The bitcoin price falls over the weekend do not appear to be linked to any particular fresh news but a continuation of the sell-off sparked earlier this month by the fork of the bitcoin cash cryptocurrency that ignited a civil war between the bitcoin rival’s two factions.
Low trading volumes over the holiday weekend, however, mean the market is more vulnerable to so-called “whales” moving large amounts of bitcoin, ripple (XRP), or ethereum. When a major coin holder sells it can trigger automatic computer controlled sell orders leading to sudden sell-offs.
Elsewhere, others remain hopeful the latest bitcoin price plunge will be short-lived and can be remedied with increased institutional involvement and regulatory oversight of the cryptocurrency space.
“Bitcoin’s latest plunge is evidence of the need for greater regulatory oversight to give a boost to investor confidence,” said Herbert Sim, the chief commercial officer at Cryptology, a cryptocurrency exchange based in Singapore. “There is already a huge amount of capital tied up in cryptocurrencies, in excess of $100 billion, so why allow it to continue being a rogue market?
“In order for the space to move forward and investor confidence to settle, regulators need to put standards in place to separate the weeds from the roses in the cryptocurrency world. Having oversight of the cryptocurrency Wild West will legitimize, and subsequently stabilize the industry, which will allow it to reach the next step of maturity.”
“There’s still a lot of people in this game,” Stephen Innes, head of trading for Asia Pacific at Oanda, told Bloomberg last week. “If we start to see a run down toward $3,000, this thing is going to be a monster. People will be running for the exits.”
As cryptocurrency is steadily taking over the online forex trading industry, more and more specifically tailored solutions are being developed. The latest example is an institutional-grade venue built on the widely used Integral FX platform, Mint Exchange.
Mint Exchange officially launched publicly today, Nov. 14, as a cryptocurrency clearinghouse providing access to major exchanges, brokers and market makers through a single gateway. It is meant to offer better liquidity for institutions to trade across cryptocurrency markets, while keeping their capital in the secure environment they are used to. The exchange maintains development, support, and sales offices in Palo Alto, California, London, and New York.
The company behind the new clearinghouse says that many of the top global FX brokers are already trading cryptocurrencies on Mint Exchange. “We’re addressing an enormous unmet need in the growing cryptocurrency market,” comments Harpal Sandhu, Chairman of Mint Exchange and CEO of Integral. “FX brokers, asset managers, and institutions have largely remained on the sidelines of the cryptocurrency market waiting for a trusted partner to deliver a robust, professional-grade exchange. They expect to manage their crypto trading in one secure location. That’s what Mint Exchange offers.”
Exchange Built on the Integral FX Platform
Founded in 1993, Integral is a cloud-based workflow management and trading technology provider for banks, brokers, and asset managers operating in the foreign exchange market. Its services are reportedly used by more than 200 financial institutions, including Bank of America, Citi, UBS, Wells Fargo and more. “Integral processes over $40 billion/day in fiat currency trading, so we’re confident that it can handle our cryptocurrency volumes,” Masato Kikuchi, Managing Director of Mint Exchange, explained why they licensed the platform.
“As more institutional players enter the crypto-asset market, liquidity providers need sophisticated technology and risk management tools to service their needs. Mint Exchange was the first to deliver a complete solution that also includes robust security and custody,” commented Todd Morakis, Co-Founder of JST Systems in Singapore, one of the launch partners of the new venue.
Bitcoin Group SE has bought 100 percent shares of investment bank Tremmel for an undisclosed amount. This is the German digital currency exchange operator’s second acquisition in 2018. Bitcoin Group, which holds current assets of $40 million, said Tremmel allows it to issue its own cryptocurrency-related products, conduct proprietary trading and operate bitcoin ATMs.
The Frankfurt Stock Exchange-listed company operates Bitcoin.de, Germany’s only regulated digital currency exchange, trading BTC, BCH and ETH. It hopes to use Tremmel’s banking license to expand the range of its service portfolio. For example, Bitcoin Group said it is now possible for the trading platform to maintain an order book and even quote prices, while simultaneously ensuring more liquid trading.
“We are very pleased that in Tremmel Wertpapierhandelsbank Gmbh…we have been able to gain an excellently positioned partner with in-depth knowledge of the market,” Marco Bodewein, managing director of Bitcoin Group, said in an online statement on Nov. 12. “This will enable us to take the corporate development of Bitcoin Group SE to a new level,” he added.
The deal is expected to be completed in the first half of 2019, subject to approval by relevant regulatory authorities. Bitcoin Group did not disclose the actual purchase price, but said “it is in the lower seven-digit euro range.”
Rainer Bergmann, the previous sole shareholder and managing director of Tremmel, is to continue working at the investment bank in the same capacity. The bank, which trades shares, bonds and other stock exchange products on behalf of local and foreign banks, insurance companies and asset managers, will be expanded into a deposit-taking institution, Bitcoin Group said.
Digital currency exchanges are looking for growth in new areas or to consolidate existing positions to help boost revenue and minimize risk from an uncertain regulatory environment in their home economies.
In January, Bitcoin Group, which has 753,000 investors actively using its exchange to buy and sell digital assets, bought a 50 percent stake in financial investment broker Sineus Financial Services Gmbh, to diversify risk. “In the future, this will enable the group to offer additional financial services in the cryptocurrency sector,” the company said at the time.
For the first six months of this year, Bitcoin Group reported net profit increase of 306 percent to $3.85 million from $0.95 million a year earlier. Revenues tripled to $6.57 million from $2.1 million in the comparable period a year ago. Operating profit climbed 368 percent to $5.64 million. The exchange said about $707.6 million worth of BTC was traded on the platform at the end of last year, when the price of the cryptocurrency peaked at $20,000.
After close Tuesday, shares of Bitcoin Group were down 0.36 percent at $31.41 in Frankfurt trading. Over the past 52 weeks, the stock has reached a low of $28.02 and a high of $97.18.
Institutional investors and the cryptocurrency market Pexels.com It’s official: institutional players have entered the crypto race. Bloomberg reported that large buyers such as hedge and endowments funds have been consistently purchasing over $100,000,000 worth of digital coins through private transactions. Miners are now scheduling regular, over-the-counter (OTC) coin sales. […]
Previously, large investors have stayed clear from the crypto-investing space due to high volatility of the key currencies. As bitcoin and ether prices have seemed to reach certain equilibrium this year, more and more traditional financial institutions have started diversifying their portfolios with crypto assets.
Miners are now scheduling regular, over-the-counter (OTC) coin sales. Some have even set up their own liquidity desks and operations to accommodate the estimated $250 million to $30 billion in trades.
Previously, large investors have stayed clear from the crypto-investing space due to high volatility of the key currencies. As bitcoin and ether prices have seemed to reach certain equilibrium this year, more and more traditional financial institutions have started diversifying their portfolios with crypto assets.
For individual investors, this active interest from larger player presents a range of new opportunities as well.
New crypto-investment products are underway
Considering the current demand, large investment firms will not stay away from launching dedicated crypto-investment products for much longer. In fact, Goldman Sachs Group has just become the first investment bank to offer a bitcoin trading product to its customers. At the beginning of November, the company started onboarding a small number of clients to test their new crypto trading desk, which allows trading bitcoin non-deliverable forward contracts.
Intercontinental Exchange (ICE), the owner New York Stock Exchange, has also scheduled a launch of their bitcoin futures product for later in December. The contracts will be backed by bitcoin reserves held in ICE’s Digital Asset Warehouse, meaning that actual bitcoins will change hands once the contract expires. All futures contract will also be validated through ICE Clear U.S.
“Legislative changes regarding financial products are bringing in more transparency and legitimacy to the crypto-trading space,” said Hayato Terai, Co-CEO of G8C token-issuing GanaEight Coin Ltd., a Ganapati Group company. “The ICO space will soon undergo similar changes as well. With better regulations and security mechanisms such as tokenized securities and stablecoins already being introduced, we should expect more interest and participation from institutional investors.”
Earlier this year, Goldman Sachs’ Principal Strategic Investments Group and Galaxy Digital Ventures LLC jointly invested in BitGo’s product – a new generation custodian purpose-built wallet for storing digital assets, designed specifically for institutional investors.
Clearly, institutional investors are growing their tech muscle to accommodate more crypto-trades. Individual investors should definitely stay alert for the new products entering the market.
Institutional investors can prevent market imbalance
Large volume crypto purchases took place over the counter to avoid swinging the crypto markets and crashing the exchanges. A lot in the industry fear that bitcoin liquidity may soon become a problem due to institutional investors’ participation. However, during the past two months, the crypto markets remained stable despite large volume purchases and did not tick upside.
In fact, institutional investors can “anchor” the current market whales, possessing significant crypto holdings and capable to distort crypto prices with little-to-no consequences. Unlike individuals, financial institutions are largely restricted in their abilities to manipulate the markets on a large scale. So their active presence may actually contribute to more stable prices.
Crypto-trading security will likely improve
One of the biggest issues preventing further market penetration for institutional investors is the lack of proper, secure infrastructure. At the moment, only a handful of custodians meet the security standards imposed by regulators.
Additionally, most players have not yet figured out the optimal KYC procedures for their customers. In fact, a staggering 68% of cryptocurrency exchanges operating in the U.S. and Europe are not fully KYC compliant. Most of them allow users to trade fiat and cryptocurrencies without providing any identification documents or undergoing a KYC check. Trust in the crypto trading space remains low, especially among the regulators, who, in turn, try to push stronger regulations and verification procedures.
However, most institutional investors are now working closely with the regulating bodies to develop clear KYC/AML policies and guidelines that favor both parties. Crypto EFT is getting closer to the approval with the SEC in the US. In Switzerland, Crypto Fund AG has recently become the first and only crypto asset manager, authorized by the local Financial Authority. The precedent has been set and more international regulators will move forward with approving new financial tools for both institutional and individual investors.
Institutional investors offer a fresh inflow of capital and liquidity and propel the development and adoption of new regulatory frameworks. Ultimately, this will add more transparency and legitimacy into the crypto trading space and push the markets further. It’s too early to assess the exact impact of institutional money in the space, but clearly, it signifies a new major milestone for the cryptocurrencies.
You’ve mastered stocks, the building block of most financial markets. You’ve got a pretty good handle on mutual funds and have even started dipping your toes into ETFs and REITs. Now you’re ready to start making your portfolio a little more sophisticated. For the right investor, commodities might be
You’ve mastered stocks, the building block of most financial markets. You’ve got a pretty good handle on mutual funds and have even started dipping your toes into ETFs and REITs.
Now you’re ready to start making your portfolio a little more sophisticated. For the right investor, commodities might be the next move.
Is Commodity Trading Risky?
Before getting into the details of commodities trading we will discuss the risks.
Commodities are a high-risk, high-reward market that draw investors because of their potential upside. A particularly successful trade can make the investor a lot of money very quickly.
However, a bad trade can cost you. Many commodities contracts have virtually unlimited losses. What’s worse, unlike with stocks, many can result in you actually owing more money than you invested. Read on, but invest with care.
What Are Commodities?
A commodity investment deals with specific, raw goods like wood, pork, soybeans, gold or oil. This is different from stocks and related securities, which deal with corporate performance.
The typical commodities trader deals with futures and options contracts and is involved in buying or selling raw materials for future delivery. A commodities contract specifies:
• The specific commodity being traded;
• The date on which the sale will occur, called the expiration date; and
• The price per unit, called the strike price.
The profit margin on these contracts comes from contracting today to buy or sell products in the future at a better price than they might go for on a future date.
The typical structure of commodities trading is the futures contract. This contract is literally a deal to buy and receive the physical goods or to acquire and sell those goods by the expiration date. If you enter a futures contract for 100 pounds of orange juice, a truck will arrive with cans of fruit juice concentrate unless you sell or close out the position.
Investors buy futures contracts to profit off of them. A trader doesn’t want to receive the actual goods, he or she wants to make money by entering into a valuable contract.
Producers and retailers buy futures contracts to control prices and mitigate risks. Someone who actually uses a given product isn’t trying to leverage the financial market, they’re trying to plan for operational costs or profits.
Long vs. Short Positions
Commodities contracts can involve either selling or buying the materials.
A long position is a contract to buy the materials in question at a future date for an agreed-upon price. In this deal, the other party agrees to acquire and then sell you the commodity in question.
A short position is a contract to sell the product in question at a future date for an agreed-upon price. In this deal, the you agree to acquire and then sell to the other party the commodity in question.
Sam Investor takes a long position for 10 ounces of gold in six months at $1,000 per ounce. This contract means that Sam agrees to buy 10 ounces of gold in exactly six months for $1,000 per ounce.
Sam wants the value of this contract. If gold sells for $1,100 per ounce at his contract’s expiration date, Sam will have the right to buy 10 ounces of gold for $100 per ounce less than they’re worth. This will make the contract worth $1,000 when Sam closes out his position.
If the price goes down, however, Sam will have to pay its value. If gold sells for $900 per ounce, Sam will now have to buy gold for $100 per ounce more than it’s worth. This contract will cost him $1,000.
Liz Farmer takes a short position for 100 bushels of soybeans in six months at $10 per bushel. This contract means that Liz agrees to sell 100 bushels of soybeans in exactly six months for $10 per bushel.
As a farmer, Liz does this to establish price security. If the price of soybeans drops below $10 per bushel, she has still guaranteed a market for 100 bushels at the price she wants. If the price of soybeans goes above $10 per bushel, she will lose the opportunity for that additional profit because she will still be obligated to sell at $10 per bushel.
Closing Out a Position
Cash Settlement Contracts
While technically a futures contract is one for future delivery of a product, most are contracts between investors. These deals are built around what’s called “cash settlement.”
In a cash settlement contract the parties never actually deliver any assets. Rather, at the expiration date they simply exchange the value of the contract in cash.
In a physical delivery contract, at the expiration date the parties actually show up with a truck full of raw materials.
Many commodities traders participate in the market for exactly this reason. Farmers, such as in our example above, use the futures market to lock in prices for sale of their crops. Retailers will use it to establish predictable prices for goods on the shelf. This is how the futures market was originally developed.
Investors, who do not want to handle physical assets, will typically resolve a physical delivery contract by closing it out. This is when the investor takes an equal but opposite position to their current contract. A long position will cancel out a short position and vice versa, creating a zero-sum liability for the trader.
For example, in our gold trading hypothetical above, Sam Investor holds a long position for 10 ounces of gold in 60 days. If he took a short position for 10 ounces of gold in 60 days at the same price, he would hold an equal but opposite contract. The clearinghouse would consider his position closed out, or “flat,” because the two positions would cancel each other out.
Options vs. Futures
There are two main types of contracts in commodities trading: futures and options.
In a futures contract you, the contract holder, have the obligation to either buy or sell the product on the given expiration date for the given price.
For example, a long position on crude oil for 1,000 barrels at $75 per barrel on June 1 means that on June 1, you must buy 1,000 barrels for $75 per barrel.
In an options contract you, the contract holder, have the right, but not the obligation, to buy or sell the product on the given expiration date for the given price. Further, you may execute the contract at any time before the expiration date.
For example, a long option on crude oil for 1,000 barrels at $75 per barrel on June 1 means that at any time by or before June 1, you may buy 1,000 barrels for $75 per barrel. If you don’t exercise this right by June 1 the contract expires unused.
Because options contracts don’t obligate you to anything, they don’t have the risk that a futures contract does. You can walk away at any time with no further loss.
Most options contracts come with a premium. This is the fee you have to pay upon signing the contract. Futures contracts rarely have premiums, but they typically require that you have a minimum amount of money in your brokerage account to cover potential losses.
Advantages and Disadvantages of Commodities Trading
There are two main advantages to commodities trading. The first is diversification. Often the commodities market will move countercyclically to the stock market. As a result, this position can help buffer a portfolio from downturns.
The second advantage is speculative gains. Simply put, when a commodities contract does well it can perform spectacularly. Investors can make fortunes off of a single trade.
However, and we cannot stress this enough, the opposite is also true. Investors can lose fortunes off of a single trade as well. This is because of the chief risk to futures trading is nearly unlimited, back-end risk. With a futures contract you cannot predict how much money it may cost.
A futures contract is not like a stock purchase, where you can only lose the money you’ve put in. A futures contract actually calls for future performance by you, the investor. This means that if your position ends out of the money (that is, if it ends in a money-losing position) you will actually have to pay on that contract.
And a contract that goes disastrously can end with you owing a lot of money.
This is why retail investors would be well advised to focus on options contracts. While options are more expensive up front than futures contracts due to their premiums, they also come with a tightly capped risk profile: You can never lose more than the cost of the premium. This creates a mechanism for you to invest in commodities while keeping a predictable risk profile.