A futures contract is a contract between two parties where the buyer agrees to accept delivery of a item in a future month at a specified price. Unlike options, the futures contract is a requirement to buy the commodity. Most commodities trades, though, are not completed. The investor usually closes out his or her position before delivery of the goods.
There are two types of commodities traders: the hedger and the speculator. The hedger is an investor trying to avoid the risk of loss through price variation. A short hedger will sell a futures contract to protect from falling prices of the actual commodity. A long hedger purchases a futures contract to protect against the possible advance in the price of the commodity to be purchased in the future.
The speculator voluntarily assumes the risk that the hedger is attempting to avoid. The high volume of commodities trades is due to the presence of speculators. The speculator hopes to make money buy investing in futures contract on the belief of either falling or rising prices in the future. However, there is huge risk involved in the speculator’s position.
Commodities are very risky, especially if you do not fully understand the market. If you are interested in investing in commodities, we recommend that you carefully study resources that go into more depth than this guide.