Some of the reasons that make investing in commodity futures an attractive preposition
are defined below:
Leverage: Commodity Futures trading is done on margins. The investor only
deposits a fraction of the value of the futures contract with the broker to cover
the exchange specified margin requirements. This gives the investor greater leverage
and thus the ability to generate higher returns.
Liquidity: Unlike investment vehicles like real estate, investments in commodity
futures offer high liquidity. It is equally easy to both buy and sell futures and
an investor can easily liquidate his position whenever required. There is also another
advantage of being able to use the profits from a trade elsewhere, without having
to close the position.
Diversification: Investments in commodity markets are an excellent means
of portfolio diversification. For example, gold prices have historically shown a
low correlation with most other asset prices (such as equities) and thus offer an
excellent means for portfolio diversification.
Inflation Hedge: As the commodity prices determine price levels and consequently
inflation, investing in commodity futures can act as a hedge against inflation.
Large numbers of commodity are traded on commodity exchanges in around the world.
The commodities are classified on the basis of their use and consumption. Further
classification is based on the characteristics of the commodity. Some of the commodities
traded on various futures exchanges are as follows:
Precious Metal: Gold, Platinum, Palladium, Silver etc.
Industrial Metal: Copper, Lead, Zinc, Tin, Aluminum, Nickel, etc.
Energy: Natural Gas, Crude Oil
Food Stuff: Barley, Coffee, Wheat, Sunflower Oil, Cocoa, Sugar, Maize, Rough
Rice, Soybean etc.