Ways to Invest in Commodities Futures - dummies

Ways to Invest in Commodities Futures

By Amine Bouchentouf

You have a number of investment vehicles to access the commodities futures markets. A common misconception among investors is that you can only trade commodities by opening a futures account. While the futures markets certainly provide an avenue into the commodities markets, you have other tools at your disposal.

Futures Commission Merchant

Opening an account with a Futures Commission Merchant (FCM) is the most direct way for you to invest in commodities through the futures markets. An FCM is registered with the National Futures Association (NFA) and its activities are monitored by the Commodity Futures Trading Commission (CFTC).

When you open an account with an FCM, you can actually trade futures contracts, options, and other derivative products directly through the main commodity exchanges. Your orders are sometimes routed electronically or are placed during the open outcry trading session. However, you should only open an account with an FCM if you have a solid grasp of trading futures and options.

Commodity Trading Advisor

A Commodity Trading Advisor (CTA) is authorized by the CFTC and the NFA to trade on behalf of individual clients in the futures markets. The CTA is a registered investment professional who has a good grasp of the concepts in the futures markets. However, before you invest through a CTA, you should research their track record and investment philosophy.

Commodity Pool Operator

The Commodity Pool Operator (CPO) is similar to the CTA in that she has the authority to invest on behalf of clients in the futures markets. The biggest difference is that CPOs are allowed to “pool” client accounts under one giant account and enter the markets en masse.

The pooling of client funds offers two advantages: It increases the purchasing power of the fund and it provides additional leverage. In addition, because a CPO is usually registered as a company, you can only lose your principal (in case things go wrong). In other words, you won’t get any margin calls and owe the exchange money.