Friday

Getting Started in Futures Trading: Consider Grains!

Post a Comment April 17, 2009 – 9:00 am |   | Permalink |  Print This Post |

If you’re just getting started in the Futures and Commodity trading arena, grain commodity futures may be the way to go. The most common of these grains is corn and wheat. They have recently made enormous price jumps, and are duly considered a favorite among grain traders.

Grains, especially wheat, play a very important part in our everyday lives and routines. Many foods we eat today are derived from wheat: pasta, noodles, biscuits, bread and many more. The objective of trading grains futures of course is like any other trade: buy low, sell high.

Grain futures trading can be an ideal way for investors to take a short, medium or long term view on a particular grain. But it’s important to understand that prices can be just as volatile as any other investment. Weather, supply and demand play a huge factor in pricing.

Food producers commonly use grain contracts to hedge their price risk. This can be very important as there is always the potential for price to be significantly lower at the time of selling their produce. Hedging can help reduce this risk.

In the past few years alone since 2005, the price of wheat has risen substantially. It has gone from 300 cents a bushel to over 800 cents a bushel. The higher prices have the potential to present excellent trading opportunities.

CBOT wheat futures are the most commonly traded contract. The standard contract is 5,000 bushels. One bushel is 35.24 liters. Bushels are priced in cents. So if the price of a contract was currently 850, it would be $8.50 a bushel. The nominal value in this instance would be $42,500. This would be the $8.50 per bushel multiplied by 5,000. You can see how, if you bought a contract for $5.00 a bushel, and sold for $7.50 a bushel you would just a little bit of profit in your pocket.

As with all futures contracts, it is important to fully understand the risks involved before trading. Generally speaking, the higher the risk, the higher the potential return. Futures definitely fall into this high risk category. Between price volatility and margin calls, it’s not for the faint of heart. With wheat almost tripling in price in recent years, there is definitely an investor’s opportunity to be had!

If you’re just getting started, be sure to educate yourself. It may be a good idea to trade on paper before actually risking any real money.