The trading commodity futures has a glamour that you do not find with stocks or bonds. Buying a gold future has more sparkle than a savings bond. Investing in sugar can reward you with sweet profits if your trade coincides with a market rally. Trading crude oil carries with it high risks but also high rewards. The amount of money you need to start trading commodity futures depends on the exchange on which the commodity trades.
Understanding Commodity Futures
Commodity futures are contracts used to buy and sell individual commodities. The commodities market includes metals such as gold, silver and platinum; agricultural products like corn, wheat and soybeans; energy -- crude oil, unleaded gasoline and heating oil; and "softs," such as coffee, sugar and cocoa. One futures contract controls a certain amount of the underlying commodity. For example, one crude oil contract controls 42,000 U.S. gallons of oil. One coffee contract controls 37,500 pounds of coffee. One gold contract controls 100 troy ounces of gold.
After opening your futures trading account, you must deposit the initial margin amount before you can start trading. The exchange on which the future is traded determines the initial margin amount. For example, trading one futures contract of Brent Crude oil on the Chicago Mercantile Exchange requires an initial margin deposit of $5,500, but on the New York Mercantile Exchange, the initial margin is $9,788. Each exchange has the right to change its margin requirement at any time. Your broker will tell you how much margin you need to deposit.
Along with the initial margin you must also keep the exchange’s maintenance margin amount in your account. The maintenance margin acts to offset any loss you might incur if the market moves against your trade. For example, if you trade gold futures contracts through the Globex Exchange, your initial margin is $4,300 and your maintenance margin is $3,250 per contract. If your trade starts losing money, the loss amount will be taken out of your maintenance margin account and added back to your initial margin account.
If your maintenance margin account falls below the required level, expect to receive a phone call from your broker instructing you to replace the funds. For example, say you open a trade requiring $5,000 in initial margin and $4,000 in maintenance margin. The market moves against you and your account balance falls to $3,500. The $1,500 loss, which is the difference between the $5,000 initial margin and the $3,500 account balance, is taken from your maintenance account to restore your account back to the $5,000 initial margin level. You must deposit $1,500 to bring the maintenance account back to the required $4,000 level.
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