What Are Commodities?
Commodities: you have probably heard the term before,
but what does it really mean? Simply, commodities are goods like beef, gold or lumber.
When farmers and other producers put their goods up for sale they are selling commodities.
But, you may be thinking, I don't raise cattle or mine gold... how
can I trade commodities? You will be acting as a speculator or a middleman. For instance,
let us follow the life of some corn and I will show you how you fit into this picture.
Imagine a small field of corn growing on a farmer Joe's farm. This
particular field of corn is still too young to be sold, but farmer Joe has been watching
the corn market by checking the price of a bushel of corn in the newspaper every morning.
He has watched the price of a bushel of corn go from $3.01 per bushel to $3.16 per bushel
over the last month. He knows that it costs him about $2.50 per bushel to break even
farming the corn. So when he wakes up on Wednesday morning and he reads in the newspaper
that the price of corn has gone to $3.25 per bushel, he decides that he is going to sell
his field of corn at that price. He figures that at $3.25 per bushel, he is pulling in a
decent profit on his crop. He realizes that the price of corn may continue to go up or it
may go lower
no one really knows. He is willing to sell because he wants to lock in
that price for his corn. So farmer Joe calls up his broker, and tells his broker that he
wants to sell his corn. But farmer Joe's corn is not going to be ready to harvest until 3
months later. So farmer Joe sells his corn with the understanding that he will deliver
that amount of corn 3 months from that day. But who is going to agree to pay $3.25 per
bushel for farmer Joe's corn crop?
That is where we come in as speculators or middlemen
price of corn varies daily and millions of bushels are bought and sold everyday, there is
an opportunity to make money by buying farmer Joe's corn at $3.25 per bushel and waiting a
few days then selling it to someone else for $3.35. Looking at our example, let us say
that we decide to buy farmer Joe's entire field of corn (which turns out to be 5000
bushels of corn) for $3.25 per bushel. In reality, all we have to do is put up a deposit
to say we are going to buy 5000 bushels; we do not have to put up all of the money (this
is all described in detail in our 200 Level Courses). The next day farmer Joe checks the
price of corn and it is at $3.40 per bushel. The day after that, farmer Joe checks the
price of corn and it is at $3.55 per bushel. He wishes that he had waited two more days to
sell it to us, but he does not feel that bad because he still made about 75 cents per
bushel. It cost him $2.50 to make and he sold it for $3.25. We decide that it is time to
sell the 5000 bushels we bought from farmer Joe to someone else for $3.55 per bushel. We
end up making 30 cents per bushel in just two days! 30 cents per bushel times 5000 bushels
is $1500.00 in two days!
This story, although slightly simplified, is how easy it is to turn a
decent profit in a short period of time trading commodities. In our 200 Level Courses we
teach you how to spot markets that have excellent potential for profit and, better yet, we
teach you how to practice without risking any of your own money while you test these
market strategies to prove that they work.
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