Trading Commodities - Reading Prices

If you're confused by commodities, you're not alone.

For a short lesson in how this works, let's do a quick overview. Most trades work by investors' buying and selling futures contracts, rather than trading directly in the commodity itself. Most futures contracts trade similarly to stocks or bonds. The exception is that they have an expiration date, unlike stocks or bonds. Even so, this type of trading can still confuse someone who's not familiar with this world. One element that's part of this world and is pretty basic is price quotes.

Gold

Gold is a commodity that most beginning traders are interested in. Basically, gold is very enticing and has a historical track record. It's also very accessible and has a general allure that's irresistible to many. For gold, price quotes are generally pretty straightforward and have relatively few troubles.

Gold price movements' minimums are set by the exchanges. For example, gold futures traded on the Commodity Exchange of New York, also called COMEX, have a minimum "tick" or price movement of $.10. Each futures contracts deals with 100 troy ounces, which makes the minimum tick per contract $10. That's a significantly greater amount than the average stock investor is used to, because prices they are typically move from $.10 to $.25 per share there.

In this instance, quotes are often shown without the dollar sign present. Sometimes the decimal point is also ignored. Therefore, the price of $580.65 per troy ounce of gold might be shown as "58065". However, it would normally be displayed as "580.65".

Natural Gas

Natural gas is traded on the New York Mercantile Exchange, also known as NYMEX. On NYMEX, the minimum price change is one cent. Prices are noted as dollars per million metric British thermal units, or mm BTU. Basically, a BTU is a measure of energy that is produced by burning natural gas.

A standard natural gas futures contract is 1000 mm BTU. Therefore, if the price rose from $35.50 to $36, this would represent an increase of $.50, which times 1000 (standard natural gas futures contract) equals $500.

Live Cattle

One trades live cattle futures on the CME, or the Chicago Mercantile Exchange. The CME is one of the oldest and largest exchanges in the United States. Here, prices are established in cents per hundredweight. A standard contract usually deals with 40,000 hundredweight.

The minimum price movement, or tick, is 0.025 cents, with a movement from 71.125 to 72.125 showing as follows:

$.72125 minus $.71125 equals $.0100

$.0100 times $40,000 equals $400

Coffee

Coffee is what commodity traders call a "soft" commodity, used to distinguish it from other commodities such as metals, grains, or energy. It is traded on the Coffee, Sugar and Cocoa Exchange, or CSCE. Its price is quoted in cents per pound. The standard contract size is 37,500 pounds.

The minimum tick, or movement, on it is $.05; therefore, a contract price changes as follows:

$.0005 times 37,500 equals $18.75. Therefore, if the price is listed as 115.45, that equals 115.45 per pound, or $1.1545 per pound.

Corn

Corn is among the grains are traded, and it arguably has the longest history. Corn has been around and harvested as a food source for thousands of years. It formed one of the earliest "forward" contracts.

Corn prices are quoted in cents per bushel. Movement on price change is comprised of one quarter of one cent. A standard contract is for 5000 bushels. Therefore, a price listed as 290 means a cost of $2.90 per bushel.

Therefore, if a contract price changes from 290 to 291, this would mean:

$2.91 minus $2.90 equals one cent.

One cent times 5000 equals $50.

Therefore, a one-cent movement in commodity price affects one contract by $50. This is quite different than the rather minute changes experienced in stocks or bonds.

Simply, commodity prices change fast. They often change significantly in a single day. This means that commodities trading is much more volatile and therefore risky than technical market traders can participate in. If you decide to participate in commodities trading, be prepared for a fast ride, with lots of adrenaline coursing through your veins.