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What is a Commodities Account?

A commodities account is a specialized brokerage account that allows investors to trade in physical goods like oil, gold, or agricultural products. It's a gateway to the dynamic world of commodities markets, where prices fluctuate with global supply and demand. Ready to explore how commodities can diversify your portfolio? Let's delve deeper into the mechanics and potential of commodities trading.
Ken Black
Ken Black

Those who wish to invest in commodities often do so by opening a commodities account. Unlike other types of investment options, a commodities account will include nothing but commodities. In some situations, it may only include one commodity, but this does not have to the case. The inclusion of more than one commodity may help insulate the investment against wide fluctuations that can often happen with any individual commodity product.

In general, a commodities account represents one of the riskiest types of investment. Commodities trading not only takes a substantial amount of experience in order to be successful over the long term, it may also require a little bit of luck. In this type of investing, weather in one part of the world could affect prices all over the globe. One disease affecting a corn or soybean crop could increase prices, making an individual very successful. Likewise, if a certain commodity is thought to be oversupplied, the market for it will drop substantially.

A buyer who goes long on a commodity is anticipating prices to rise.
A buyer who goes long on a commodity is anticipating prices to rise.

In most cases, to open a commodities account an investor will talk to an introducing broker, or open one through a registered Futures Commission Merchant. Both of these sources deal with commodities, and can help investors start an account based on the preferences the investor has. These groups cannot guarantee that a trader will be successful in the commodities market, but can give the trader the tools needed to get started.

Opening a commodities account means that the investor is planning to take a position on the market. The two positions the investor can take are a long position and a short position. Those who are taking a long position are buying, expecting that the price of the commodity will go up in the future as a futures contract nears maturity. Those who take a short position believe the commodities market rate is already high and will only go lower, meaning they sell commodities.

The vast majority of those who buy and sell commodities are doing so with no intention of taking physical delivery of the commodity, though they are obligated to do so if they own the commodity, and it comes ready for delivery. To avoid that situation from happening, most commodity traders will eventually sell their commodities, even if it means taking a loss. Therefore, investment turnover in a commodities account is much higher than it is for most other investment accounts, which leads to greater volatility.

In addition to traditional commodities accounts, there is another type of account known as a commodities pool. This is a type of commodities account that pools investors together and treats them as a single unit. In reality, investors interested in this type of account are not buying the commodities themselves, but rather buying shares in a pool.

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    • A buyer who goes long on a commodity is anticipating prices to rise.
      By: naypong
      A buyer who goes long on a commodity is anticipating prices to rise.