Financial Question: Commodities

[Seeker]

When people say they are going to 'buy commodity x', what exactly do they mean?

Are they buying stocks in related companies or future contracts, or the actual item?

About futures: Do futures have a 'timer' where you have to redeem them by a certain date?

Or could one buy futures and hold them as long as he wanted?

[Provost Harrison]

Aren't stocks used for restraining people so fruit and other objects can be thrown at them?

[Seeker]

These days people would rather keep the fruit and throw stock certificates...

[MikeH]

Watch Trading Places.

[PuddlewatchHQ]

Yes these would be futures contracts and yes they have a set date. The date is important for setting the price that is how the futures market works. If you don't know the market and commodity cycle well you shouldn't be investing in futures. Futures are chiefly for business who need those commodities at a set time in order to function. Speculating on futures should only be done by those who are wealthy enough to stand the high risk involved or those who enjoy gambling on a relatively unpredictable financial instrument which is otherwise very boring.

[PuddlewatchHQ]

Futures are time dependant. The buyer must be able to take possession of the commodity when the contract specifies. So if you are trading in grain you have to be able to store said grain when you agree to buy said grain. Just as an example.

[Darius871]

Futures are time dependant. The buyer must be able to take possession of the commodity when the contract specifies. So if you are trading in grain you have to be able to store said grain when you agree to buy said grain. Just as an example.

What if you have the money to pay on the contract but no ability to take possession at the right time? Does it just rot in the sun?

[DanS]

In addition to futures contracts, there are Exchange Traded Funds (appear like stocks) that invest in commodities. You can choose your leverage ratio. Much simpler to work with, if you want to speculate every now and then.

[Provost Harrison]

I'm bored now.

What was that about throwing fruit again?

[Theben]

Puddlewatch joined in '01? Long time lurker? I don't recall seeing you before.

[Japher]

I heard that only about 3% of all future contracts end with delivery of the commodity, most are just settlements on the margin accounts that insure the future.

[Zkribbler]

No one yet has mentioned what commodies are.
Stuff like corn, wheat, gold, silver, pork bellies -- stuff like that.
You buy contracts whereby theoretically you can take possession of a unit of them in the future. [It's almost unheard of for any trader to actually take possession of them. Towards the end of the contract period, the contract is sold--for a profit or a loss--to someone who actually uses the commodity.]