It's all about making a bet on the future 🔮
How does commodity investing work? Manufacturers, farmers, and miners buy or sell goods in such large quantities that price fluctuations can prevent them from planning for the future.
So traders invented futures contracts. You can get the full lowdown on how these work in our Futures & Options Pack, but for a quick refresher: a futures contract is a commitment to buy or sell something in the future at a certain date and price. A contract could specify that on November 20th you’re going to buy 1,000 barrels of oil for $70 per barrel – come November 20th, the contract settles and you’re given a bunch of oil.
These futures contracts guarantee the price way in advance of the actual transaction date, offering stability to industry.
Commodities can be bought and sold in their physical form, but the industrial scales involved can make it hard for small investors to get a look in. So the side benefit of futures is they allow people like you to invest in things like copper or wheat.
How? Futures are available to buy and sell, so you can speculate on the price. Say the price of coffee is $1 per pound, and you think it’ll soar to $2 by year’s end – you could buy a futures contract for coffee that settles in December at $1.50. Come November, if coffee’s trading at $1.75 per pound, your futures contract becomes rather valuable. Starbucks will collect that coffee contract for their next brew, and serve you a tidy profit (though they can’t guarantee to spell your name right on the cup 🤷)
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