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Information about Commodities

What are Commodity futures? | How do I trade commodity futures? | What trading strategies can you use Commodity for? | What are the advantages of trading commodity futures? | Risks of trading Commodity Futures | What commodity futures are available? | Where can i find out more information about trading commodity futures?

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WHAT ARE COMMODITY FUTURES?

The Johannesburg Stock Exchange (JSE), through the South African Futures Exchange (SAFEX), offers exposure to various commodities in the futures market. Traders of all sizes have an equal opportunity to participate in the market and benefit from rising and falling international commodity prices. This opportunity affords traders the chance to open "long" or "short" positions in these underlying commodities.

A "long" position in commodity trading involves purchasing the commodity futures contract and selling it at a later stage, hopefully after the commodity price has risen. A "long" position therefore makes money in a rising market. A "short" position in commodity trading is the reverse - selling a commodity futures contract first and buying it back later. Behind the scenes, your market maker will borrow the commodities on your behalf, allowing you to sell them even though you do not actually own them. If you manage to buy them back at a lower price, you will make money. A "short" position therefore makes money in a falling market.

The commodities available for trade are Gold, Platinum, Silver, Copper and WTI Crude Oil.

Investors can use these products for a variety of reasons, ranging from hedging to diversification and the enhancement of trading strategies. For example, a trucking fleet could seek insulation against rising fuel prices or a jeweller could hedge against adverse movements in precious metal commodity prices.

PSG Online is suited to provide this service on a standalone basis as well as integrating it with a variety of alternate markets providing you with a single broker with access to all the South African markets. The single online access point offers you a far more integrated commodity trading platform and perspective.

We offer world class risk systems and an expert team of professional commodity traders who will provide you with regular trading information to analyse and decipher market movements.

HOW DO I TRADE COMMODITY FUTURES?

You are welcome to contact our skilled PSG Online team of commodity future traders. They will arrange the opening of the account and ensure that all your trades are executed at the best available commodity price. You will also receive daily statements showing your margin and cash movement.

WHAT TRADING STRATEGIES CAN YOU USE COMMODITY FUTURES FOR?

Commodity futures can be traded outright or included in a variety of trading strategies. Strategies could for example include:

Getting direct exposure to the underlying commodities, thereby reducing equity market risk.
Trading the spreads between commodities.
Using the commodity future to extract the effect of the commodity's price movement on a company's performance, thereby focusing a trading view.
Commodities can be used as proxies of market sentiment allowing the trader to indirectly trade market sentiment.

A crucial aspect of trading is that they are Rand settled. This means the Rand is the transaction currency for international commodity futures. This removes the requirement of physical settlement whilst still offering exposure to the underlying commodity. A further benefit is that although offering exposure to international commodity markets, entering a contract has no impact on an individual or corporate entities foreign allowance.

These contracts are based on and linked to COMEX and NYMEX listed equivalents adjusted to suit the local market. This enables South African investors to benefit from the liquidity of the international markets.

WHAT ARE THE ADVANTAGES OF TRADING COMMODITY FUTURES?

Commodity futures are standardised contracts that are traded on the JSE's futures exchange, SAFEX, with a centralised order book. This means buy and sell prices are posted in real-time onto the central market by the relevant market makers, which allows for transparent pricing.

Being a listed product, trading commodity futures has numerous benefits:

Futures are geared products, which means traders do not have to deposit cash to cover the full value of the position.
Futures allow individual traders to take a view on the movement of the commodity price and provide them with access to favourable exchange rates and product prices usually reserved for larger corporate clients.
Tight spreads and low trading costs allow you to enter and exit positions in the knowledge that profits are not being paid away each time there is a trade on the account.
The daily mark-to-market process allows clients the ability to track their profit or loss situation and to adjust their portfolio accordingly.
Once the position has been closed out all settlement occurs in Rand.

Risks of trading Commodity Futures

As with all financial trading, risk management is probably the most important element of an investment process. The risk of loss in trading futures contracts or commodity options can be substantial; investors should understand the risks involved in taking leveraged positions.

In addition, each currency future trade is unique and comes with its own associated risks, including volatility, exchange rate risk, credit risk, monetary risk, interest rate risk, and the possibility of government intervention in the financial markets. An experienced investor learns to evaluate these variables before making a currency transaction.

Commodity Future trading requires a high appetite for risk, time to watch the markets and an expert knowledge of the currency markets and associated trading process. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.