Commodities For Dummies

New York Mercantile Exchange (NYMEX): Aluminum, Coal, Copper, Crude Oil, Electricity, Gasoline, Gold, Heating Oil, Natural Gas, Palladium, Platinum, Propane, Silver

Chicago Mercantile Exchange (CME): Butter, Milk, Feeder Cattle, Frozen Pork Bellies, Lean Hogs, Live Cattle, Lumber

Chicago Board of Trade (CBOT): Corn, Ethanol, Gold, Oats, Rice, Silver, Soybeans, Wheat

London Metals Exchange (LME): Aluminum, Copper, Lead, Nickel, Tin, Zinc

New York Board of Trade (NYBOT): Cocoa, Coffee, Cotton, Ethanol, Frozen Concentrated Orange Juice, Sugar

Intercontinental Exchange (ICE): Coal, Crude Oil, Electricity, Natural Gas

Commodity Futures Trading Commission (CFTC)

National Futures Association (NFA)

National Association of Securities Dealers (NASD)

Securities and Exchange Commission (SEC)

Due diligence — just do it! You need to know the ins and outs of any investment you’re going to make. The best way to do so is to find out as much as possible about your target investment. Researching a potential investment is an absolute necessity if you’re going to design a strategy that takes advantage of the market fundamentals. If you want to be a successful investor, mastering the due diligence process is key.

Be creative: Too often, many investors fall into the habit of group think. One way to differentiate yourself from the average investor is by thinking outside the proverbial box and considering investments that may not be part of the main stream. For example, consider lesser-known commodities such as uranium and orange juice — which, by the way, are great investments.

Be disciplined: Investing can be a fun activity. However, you need to approach it with a lot of discipline. Markets can and do move very quickly, so knowing how to adapt to these changes is critical to surviving and thriving in the commodities arena.

Monitor your positions regularly, but not obsessively: Once you enter a position in the market, monitor it regularly to make sure that there are not drastic price swings. However, don’t monitor your investments obsessively, as in 10 or 12 times a day (unless you’re a day trader, in which case that may not be enough!). If you’re going to invest for the long-term, then take a long-term approach to investing. Simple enough, but you’d be surprise how many folks fail to follow this basic premise.

Don’t ride the highs too high and the lows too low: As a trader and investor in commodities, you’re going to have great days and you’re going to have horrible days. Even the greatest of the greatest have suffered huge losses at some point. Make sure to stay psychologically fit and composed, so that you don’t lose focus when things are going your way and you don’t get discouraged when they’re not.

Commodity Trading Advisor (CTA): The CTA is registered with the CFTC and the NFA and can trade futures contracts on your behalf.

Commodity Pool Operator (CPO): The CPO is allowed to “pool” client accounts into one big trading account. All clients share in the profits and losses of the account.

Futures Commission Merchant (FCM): The FCM is like a stock broker except she’s licensed to place orders on behalf of clients in the futures markets. If you want direct access to futures trading, then opening an account with an FCM is your best bet.

Exchange Traded Fund (ETF): A number of ETFs now track commodities. Some track individual commodities such as oil and gold, while others track a basket of commodities. ETFs allow you to invest in the futures markets — and to buy the market, so to speak — without having to open a futures trading account.

Commodity Mutual Fund: Because of the increasing popularity of commodities as an asset class, a number of mutual funds now offer funds specialized in the trading of commodities. Make sure to watch out for hidden fees.

Equity stakes in commodity companies: If you like trading stocks, then one way to play the commodities boom is to invest in the stock of companies involved in the production, transformation, and distribution of commodities. Some of these companies are involved in specific commodity sub-asset classes such as energy and metals.

Commodity Index: A commodity index tracks the performance of a number of commodity futures contracts. The commodity index is a good way to not only measure the performance of the commodities markets as a whole, but also provide you with the opportunity to “buy the market”.

Master Limited Partnership (MLP): MLPs are publicly traded partnerships. They provide you with the advantage of investing in a publicly traded security in the form of a private partnership. They offer tax advantages and invest primarily in commodity infrastructure such as pipelines and storage facilities.

Emerging Markets Funds: Some of the main beneficiaries of the commodities boom are the countries that have large deposits of these natural resources. As the demand for crude oil, gold, and other important commodities increases, these countries stand to gain. One way is to invest in emerging market funds with exposure to companies that do business in these countries.