Commodities and commodity futures
The market of commodity futures is based on the zero principle. This means that at the end of each day of the position of balance: the winners are those who truly discern, in which way the market (up or down), receive money from the losers. (The position of those who cannot pay for the day's losses, closed immediately.) In margin accounts, on which the Fund traders, reflects all adjustments, after that the party can continue to trade. The daily wrap-up and is the main feature of the market of commodity futures on the stock market, on which you can pay for the purchase of shares in the course of three days.
Another difference between stocks and commodity futures regards the volume of funds required you as collateral for transactions. At the present time the investor must Deposit at least 50% of the value of the shares announced for purchase, while in the trade of commodities is allowed greater the leverage. The minimum Deposit for the transaction, which require brokerage firms, called the initial margin (initial margin), may not be greater than 2% of the current value of the futures contract, which the client wants to buy; usually, however, this margin is 5-10%. Brokerage firms often require initial margin exceeding the exchange at least. The exchange also pay close attention to the situation on the market, increasing or decreasing the level of margin in accordance with the size of the risk of the transactions. In a volatile market exchange increases the initial margin, to protect the integrity of the futures markets, as well as too увлекшихся speculators from themselves. (The initial margin for wheat on the
Chicago Mercantile exchange in 2004. for example, was 675 dollars. or about 4% of the current value of one contract for wheat, which is when the price of wheat at the level of 3,50 per bushel cost about $ 17500. In other words, you can buy wheat value of 17500 dollars. having invested only $ 675. The initial margin SWOT for corn for the same period was equal to 540 dollars. or about 4% of the value of the futures contract for corn, the price of which was approaching 12500 USD. In 2004, when the price of oil is constantly changing, the initial margin on contracts for crude oil on the new York Mercantile exchange for the new client was equal to $ 3375. This meant that it was possible to trade standard oil contract on 1 thousand barrels a cost of more than 40 thousand dollars with a minimum Deposit in the amount of about 8%.
Here's how it works leverage:
For example, in one of the days of the February you can buy (or sell) one of the August futures contract on soybeans (the minimum volume - 5 thousand bushels) at the price of 5 dollars per bushel (the total price of the contract - 25 thousand dollars), making your initial margin in the amount of 5% of the contract value, i.e. 1250 dollars.
If you as a buyer are betting that the price of soybeans will grow, and indeed in may it rises to 10% (i.e. by 50 cents per bushel), then your futures contract is worth $ 27500. (5 thousand bushels 5,50 Dol.). You can sell the contract with the term of delivery in August with a profit of 2500 dollars. doubling your money, despite the fact that the price of soybeans has increased only by 10%. A good day for the calculations (of course, should be taken into account and the expenses for commissions and transaction costs) 27. •
But if in August the price of soybeans drops by 50 cents per bushel from the may prices and you decide to sell, your losses will 2500 dollars. Not only do they «eat» your initial margin, but also leave you in positive territory at 1250 dollars. In the end, beans fell by 10%, and you have lost 200%.
Reminder: this is why the relative lost the shirt off his back on soybeans.
Just do the math. Speculators, buying a few contracts with the payment of part of the value hope to get more profit in small money in the case, if the prices will grow. If they will rise, the more your leverage, the more you can lose.
That is why, as well as your relative, the majority of traders in commodities lose their working capital.
The loser in our example may from day to day wait for the propulsion requirements margin call from your broker, i.e. requirements cover the losses and immediately restore supporting margin (maintenance margin) - the minimum amount, which should be placed at the margin account in accordance with the requirements of the stock exchange.
A serious warning: exchange periodically review the margin requirements and brokerage firms doing the same thing behind them. Before you begin to trade futures, you should familiarize yourself with the main agreement (the margin agreement) of a brokerage firm, in order to learn, what is the minimum amount (the margin) you will need to make for a particular futures contract. Low margin is very seductive. For professional traders with a strong nervous system, which can afford the loss of considerable amounts (risk capital), the leverage provides the opportunity to earn huge amounts of money.
But few people even experienced speculators commodities are so lucky. The rest of the need to act more cautiously and as rarely as possible the use of leverage or completely refuse from him. Any player who has decided to trade futures contracts, should seriously think about левередже. And starting to trade, you should clearly understand how much money you can afford to lose on this contract, if prices move in the wrong direction, in which you expected. Remember that you can buy oil, cotton, or any other commodity, just as the stock of IBM, i.e. for the full price - the money on the barrel. And don't forget that risk capital is the money that you can really afford to lose. The money that you need for mortgage loan repayment, payment of health insurance and education for children, pension contributions or any other similar expenses, should not fall on the margin account.
When you open a margin account with a brokerage firm, your broker will transfer the necessary funds to the relevant stock exchange to cover your open positions. Each exchange has its own clearing house (clearing house), which pays income to the winners of the day and write off the losses of the losers. Clearing house in the literal sense of the word is in the center of each transaction. In contrast to the physical trade of raw materials, when trading futures buyers and sellers do not have to look for each other, they have no and obligations to each other. And, don't even met, each party may liquidate the contracts, i.e. sell the one that she bought, or buy one that sold. Clearing house is always on the other side of the transaction, in the role of guarantor. If I play on the lowering of the December corn in July, my buyer will be clearing house on the Chicago Mercantile exchange, the American stock exchange, trading contracts for corn. If my bet is correct and the price of corn to September fell, I'll buy this contract back and get the profit. The other party of the transaction - the seller of the contract is to be clearing палата28, the activity of which, incidentally, is also regulated by the Commission under the commodity futures trading (CFTC).
