Investing in Copper through Futures Trading or Mining Companies
You can invest in copper either by trading in the futures markets or by putting your investment dollars in companies that specialize in mining and processing copper ore.
Investing in copper futures contracts
Like most of the other important industrial metals, there is a futures market available for copper trading. Most of this market is used by large industrial producers and consumers of the metal, although you can also use it for investment purposes. You have two copper contracts to choose from:
LME Copper (LME: CAD): The copper contract on the London Metal Exchange (LME) accounts for over 90 percent of total copper futures activity. It represents a lot size of 25 tons. Because the LME is located in the United Kingdom, it is regulated by the British Financial Services Authority (FSA).
COMEX Copper (COMEX: HG): This copper contract trades in the COMEX division of the New York Mercantile Exchange (NYMEX). COMEX copper, which trades during the current month and subsequent 23 calendar months, is traded both electronically and through the open outcry system. It represents 25,000 pounds of copper and trades under the symbol HG.
The following figure shows the rising price of copper futures on the COMEX division of the NYMEX from 2002 to 2006. You can see the demand for copper from China, India, and other advanced developing countries increasing, putting upward pressure on the price of copper. Of course, global economic downturns affect demand for commodities, such as copper.
Investing in copper companies
Another good investment vehicle is to get involved in companies that specialize in mining and processing copper ore. The companies listed here are leaders in their industry and are involved in all aspects of the copper supply chain. The only drawback of investing in companies is that you don’t get direct exposure to the price fluctuations of the metals. Still, they’re a good option if you don’t want to venture into the futures markets.
Phelps Dodge Corporation (NYSE: PD): Founded in 1834, Phelps Dodge is one of the oldest mining companies in the United States. It is also one of the largest manufacturers and producers of copper and copper products in the world. The company has a global presence in copper mining, with operations in the United States, South Africa, the Philippines, and Peru, among others. Because of its size and experience in the industry, Phelps Dodge is in a good position to capitalize from the increased demand for copper.
Freeport-McMoRan Inc. (NYSE: FCX): Freeport-McMoRan is one of the lowest cost producers of copper in the world. It has copper mining and smelting operations across the globe and has a significant presence in Indonesia and Papua New Guinea. The company specializes in the production of highly concentrated copper ore, which it then sells on the open market. FCX also has some operations in gold and silver.
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A measure of a stock’s relative volatility. A stock with a higher beta can be expected to rise or fall more than the overall market, whereas a stock with a lower beta is less volatile than the overall market.
A theoretical model used to calculate the fair market value of an option based on time to expiration, price of the underlying stock, historical volatility, strike price, and carrying costs.
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The profit from the sale of an investment at a price that’s higher than the purchase price.
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A call option written by an investor who already owns the underlying shares. If you write a covered call and the option is exercised by the holder, then you would just deliver the stock to the holder.
Delta represents the price change of an option for every one-point change in the price of the underlying security or futures contract.
A financial instrument whose value is based on the value of another asset or index. A stock option, for example, is a type of derivative that gives you the right, but not the obligation, to buy shares of the stock at a predetermined price. The option’s value changes in relation to the price of the stock.
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Speculation on the value of one currency versus another, in which you buy one country’s currency—just as you’d buy a stock or other security—in the hope that it will appreciate relative to the value of another currency.
Contracts where you agree to buy or sell a specific amount of a commodity, currency, or other asset at a specified price on a specified future date. Unlike an option, a futures contract creates an obligation, rather than just a right, to buy and sell the underlying security.
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A chart formation in a graph of an asset price that resembles three mountaintops in a row, with the middle mountaintop being taller than the other two. The pattern indicates a trend reversal, meaning that prices are expected to fall.
An investment strategy that allows you to reduce the risk of an unfavorable price change in a security or commodity. For example, a stockholder of ABC Company who is worried about declining stock prices can offset that risk by buying a put option on ABC, allowing him to sell his shares in the future at today’s price.
Investments that don’t trade very actively and are difficult to sell on short notice.
A theoretical value representing the volatility of the security underlying an option. Implied volatility is used by the Black-Scholes model, among others, to calculate the price of an option. Implied volatility usually rises when the markets are in downtrends, and falls when the markets are in uptrends.
A condition that is met when a call option’s strike price is below the prevailing price for the underlying stock. For example, if stock ABC is trading at $125 and the option’s strike price is $120, then the option is in the money. For a put option, the strike price must be above the current market price of the stock for the option to be in the money.
A mutual fund designed to mirror the performance of a specific market index such as the Dow Jones Industrial Average or the S&P 500. Expenses of index funds tend to be lower than other mutual funds because the manager is not actively researching, buying, and selling securities.
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The perceived strength behind a price or volume movement in a security based on the rate of acceleration of that movement.
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A bond issued by a local or state government or agency. Munis generally raise money for public projects such as hospitals, roads, bridges, and sewer systems as well as general governmental operations. When you buy a muni, the interest is usually exempt from federal income tax.
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A call option written by an investor who does not already own the underlying shares. If you write a naked call and the option is exercised by the holder, then you would have to buy the stock at the market price to meet your obligation. Naked calls are very risky, though potentially very rewarding.
An electronic stock exchange established by the National Association of Securities Dealers (NASD). The Nasdaq lists over 3,200 companies and is the largest equity securities trading market in the U.S.
A system where traders on a trading floor or in a trading pit shout and use hand signals to make transactions or trades with each other.
A derivative security that gives the holder a contractual right to buy or sell a set amount of a stock, commodity, or other asset at a specified price on or before the option’s expiration date. An option is purchased for a fee, called a premium.
A person who is buying options. Call option holders have the right to buy a stipulated quantity of the underlying asset specified in the contract at a specified strike price. Put option holders have the right to sell the specified amount at the strike price.
A condition that is met when a call option’s strike price is above the prevailing price for the underlying stock. For example, if stock ABC is trading at $120 and the option’s strike price is $125, then the option is out of the money. For a put option, if the strike price is below the current market price of the stock, then the option is out of the money.
A securities market where trades are conducted by phone or computer network directly between dealers rather than on a physical trading floor. All bonds trade over-the-counter, as do unlisted stocks (generally, stocks of smaller companies that do not qualify for listing on an exchange).
A contract that gives the holder the right to sell a particular asset at a specified price at any time prior to the expiration of the option.
A company, usually traded publicly, that raises money from shareholders and invests that money in a portfolio of real estate properties. REITs are modeled after mutual funds, although the tax treatment of REIT income is different.
A statistical technique used to find the mathematical relationship between a dependent variable (such as a company’s stock price) and one or more independent variables (such as GDP, income growth, or inflation). Regression analysis is used to predict future values of the dependent variable based on changes in the independent variables.
A price movement in the opposite direction of the previous trend. When a price has gone too far and traders deem the security overbought or oversold, the price may stop rising or falling and move in the opposite direction for a period of time.
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An instruction to a broker to sell a stock at the market price after the security has touched the specified stop price. A sell stop is always placed below the present market price and is usually designed to protect a profit or limit a loss.
The general feeling among investors as to which direction the stock market is heading. If the sentiment is that prices are going up, it is said to be bullish; if the sentiment is toward a downward movement, it is bearish. Investors base sentiment on market activity and movements in the prices of securities.
A situation that occurs when you have sold something you do not own. In commodities, if you enter into a contract to sell a commodity which you don’t own with a promise to deliver it at a set price on a future date, then you are short that commodity. In stocks, you are short a stock if you have sold it and borrowed the shares from a broker to deliver to the purchaser, with an obligation to replace the borrowed shares at a future date. Being short means that you’re bearish, or negative on the market, and that your goal is to make money when the price of the security or commodity that you choose to short falls in price.
A retirement plan available to small employers and self-employed individuals in which both the employer and employee can contribute to an IRA.
An annuity contract that you purchase from an insurance company with a single upfront payment. An SPIA usually starts making regular monthly payments to you immediately.
You create a straddle when you simultaneously buy a put and a call on the same stock at the same strike price and with the same expiration date.
You build a strangle when you buy a put and a call on the same stock with the same expiration date but at strike prices that are equally out of the money. A strangle costs less than a straddle because both options are out of the money, but you only make a profit if the price of the underlying stock moves dramatically.
The price at which the stock or commodity underlying an option can be purchased (call option) or sold (put option) pursuant to the terms of the contract.
An exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate on a notional principal amount in return for receiving an adjustable rate from another party.
One-sixteenth of a point.
A price change in a security’s trades. If the next trade takes a security up in price, it’s an uptick; if it takes the security down, it’s a downtick. In futures and options trading, a tick is the minimum change in price, up or down.
The spread between the high and low prices of a security or commodity within a particular period.
Debt obligations of the U.S. government that are secured by its full faith and credit. Treasuries include bills (maturities of less than one year), notes (maturities of 1 to 10 years), and bonds (maturities of more than 10 years).
A statistical measure of the movement of a financial asset's price over time, gauging how fast the price of the asset changes. The price of a highly volatile security can change dramatically over a short period of time. A measure of the volatility of a security relative to the overall market is its beta.
A person who is selling options. Call option writers have the obligation to sell a stipulated quantity of the underlying asset specified in the contract at the specified strike price if the option is exercised by the holder. Put option writers have the obligation to buy the specified amount at the strike price if the option is exercised.