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How to Play the Commodities Markets

Formerly a haven for gunslingers and gamblers, the commodities market now offers opportunity to all investors.
Author:

I have spent the last several years working very hard through my writing, public speaking and media appearances to bring commodities to investors who have always been interested in resource trading but didn't know where to begin. That dearth of knowledge is what led me to write A Maniac Commodity Trader's Guide to Making a Fortune.

Dispelling the myths that engulf commodity trading and helping investors throw aside a deep-seated fear of trading a sector is not an easy task. The image of a person in his or her driveway getting a delivery of a truckful of orange juice or corn after trading commodities is still how some investors perceive the futures markets.

In the past, the viewpoint on commodities, at least when I started on Wall Street in 1989, was that it was simply a form of gambling and was not on the same playing field as the equities markets. Few mainstream brokerage firms would even go near these markets, and fund managers avoided them like the plague.

But the commodities markets have evolved and grown into powerhouses of their own. The exchanges --

Chicago Mercantile Exchange

(CME) - Get CME Group Inc. Class A Report

,

Chicago Board of Trade

(BOT)

, New York Board of Trade (NYBOT),

New York Mercantile Exchange

(NMX)

and others -- have had a whirlwind of IPO and merger deals in just the last few years. Wall Street and fund mangers have jumped on the bandwagon as commodities and the natural resource markets become more and more popular with and profitable for investors worldwide.

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The commodities industry has seen a revolutionary change due in large part to accessibility. Today the Internet provides a wealth of information and access for investors interested in commodities, something that was virtually nonexistent 20 years ago. New brokerage firms and technology from companies such as Interactive Brokers offer equity and commodities traders equal access to both. This is the trend of the future.

Brokerage firms that have experience trading commodities have flourished or been gobbled up in consolidation. The trading game continues as the industry continues to see change. More and more markets go electronic, and the old trading pits in Chicago and New York, where I cut my teeth, seem to be going the way of other nostalgic things like the automat and drive-in movies.

The good news for investors is all of this technology and access makes these brokerage firms more competitive and hopefully leads to lower commission rates for investors. In addition, the traditional firms that in the past would never have considered handling commodities brokerage now have realized what they've been missing and are offering both commodities and equities to their clients.

In the past, the image of a commodities trader was someone who had millions of dollars and traded pork bellies while sailing around on his yacht. Not so today. While there may still be millionaires on their yachts trading the meat markets, the truth of the matter is that resource markets in everything from orange juice to copper and sugar to gold are enticing investors of all investment levels. It's possible to open a commodities trading account with as little at $1,500 today and get commissions as low as $7 or less.

Financial planners, hedge funds and brokerage firms all must dig deeper and think out of the box for their clients in the new age of resources and commodities. Investors need to also diversify their portfolios to include at least a percentage of commodities.

This is important as a limited hedging tool against rising prices in commodities such as energy and food. We all feel the pinch at the pump when we fill up our cars and at the store when we fill up our grocery cart. These high food and energy costs and inflation in general can do a lot of damage to the stock market, and one effective way to hedge is by using commodity options on those exact commodities causing inflation.

The average investor is scratching his or her head at this point and saying, "Yes, but how do I do that?"

Don't let the term hedge scare you off or intimidate you. This is exactly why I wrote my book. I want investors who understand preferred stock but have little understanding of livestock to feel comfortable asking for an explanation. There's no sense in intimidating potential commodity investors with fancy words such as "contango" and "backwardation" without a simple, straightforward explanation.

Contango, for example, is simply a market condition in which the price of a commodity for future delivery is higher than the spot price or current price. Backwardation is the exact opposite of contango. A backwardated market will show that the price of a commodity for future delivery is lower than the spot price or current price.

See, it's simple. The words sound mysterious and complicated, but they're really not.

Today's resource boom is in full swing, and it will likely last several more years until it reaches a peak. Investors have never had a better time to learn about and trade commodities and add yet another excellent investment option to their portfolios.

Kevin Kerr is president and CEO of Kerr Trading International, LLC, a commodities trading firm based in Connecticut and Estonia. A lifelong commodities trader, he is also the editor of several highly acclaimed and successful newsletters including Resource Trader Alert and Outstanding Investments for Agora Financial and Global Resources Trader for Dow Jones. He is the author of "A Maniac Commodity Traders Guide To Making A Fortune ... A Not-So-Crazy Roadmap To Riches." He also speaks widely throughout the U.S. and abroad, and makes weekly appearances on news programs nationwide and globally on the subject of the commodities markets.