How to Make Money in Commodities

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DEPOSITORY or WAREHOUSE RECEIPT: A document issued by a bank, warehouse, or other depository indicating ownership of a stored commodity. In the case of many commodities deliverable against futures contracts, transfer or ownership of an appropriate depository receipt may affect contract delivery.

DISCRETIONARY ACCOUNT: An arrangement by which the customer holding a commodity trading account gives written power of attorney to someone else, often the broker, to buy and sell commodity futures contracts without the prior approval of the customer. Often referred to as a "managed account."

EXPIRATION DATE: The date on which a particular commodity futures contract month expires; the last day of trading in that future.

FINANCIAL INSTRUMENT: Commodities which are themselves investment vehicles. Currency, securities, and indices of their value. Examples include shares, mortgages, commercial paper, Treasury Bills and Treasury Bonds.

FIRST NOTICE DAY: The first day on which notices of intention to deliver actual commodities against futures market positions pan be received. First notice day will vary with each commodity and exchange.

FLOOR BROKER: Any person who, in or surrounding any pit or ring or other place provided by a contract market for the meeting of persons similarly engaged, executes for another any orders for the purchase or sale of any commodity for future delivery.

FLOOR TRADER: An exchange member who usually executes his or her own trades by being personally present in the pit. Sometimes called a "local."

FUNDAMENTAL ANALYSIS: Study of basic, underlying factors which will affect the supply and demand of the commodity being traded in futures contracts. Such factors are themselves called "the fundamentals."

FUTURES: A term used to designate the standardized contracts covering the sale of commodities for future delivery on a commodity exchange.

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FUTURES CONTRACT: A firm commitment to deliver or to receive a specified quantity and grade of a commodity during the designated month with price being determined by public auction among exchange members.

FUTURES PRICE: The price of a given commodity unit determined at public auction by open outcry on a futures exchange.

HEDGING: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later.

INTEREST RATE FUTURES: Futures contracts traded on commodities such as GNMA's, issuances of the U.S. Treasury, or commercial paper, the value of which is determined by interest rates and current yields. Currency is excluded from this category because interest rates play a much smaller role in the determination of currency values. Prices for interest rate futures generally move inversely in relation to interest rates. For example, when interest rates go up, the price on a financial instrument issued at a lower interest rate will have to be lowered to increase its yield to current levels.

INVERTED MARKET: A futures market in which the nearer months are selling at prices higher than the more distant months; hence a market displaying "inverse carrying charges," characteristic of markets in which supplies are currently short.

LIMIT ORDER: An order in which the customer sets a limit on price or other condition, such as time of an order, as contrasted with a "market order" which should be filled as soon as possible without pre?conditions.

LIMIT MOVE: A price that has advanced or declined the permissible limit allowed during one trading session, as fixed by the rules of a contract market. Limit moves may make execution of a customer's order impossible.

LIQUID MARKET: A market where large numbers of both buyers and sellers make order execution relatively simple, with minimal price changes.

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LIQUIDATION: Making a transaction that offsets or closes out a long futures position.

LONG: (1) One who has bought a futures contract to establish a market position; (2) a market position which obligates the holder to take delivery; (3) one who owns an inventory of the cash commodity.

MARGIN: The amount of money or collateral deposited by a client with the broker, or by a broker with the clearinghouse, for the purpose of insuring the broker or clearinghouse against loss on open futures contracts. (1) Original or initial margin is the total amount of margin per contract required by the broker when a futures position is opened; (2) Maintenance margin is a sum which must be maintained on deposit at all times. If a customer's equity in any futures position drops to or under the level because of adverse price action, the broker must issue a margin call to restore the customer's equity.

MARGIN CALL: (1) A request from a brokerage firm to a customer to bring margin deposits up to minimum levels; (2) a request by the clearinghouse to a clearing member to bring clearing margins back to minimum levels required by the clearinghouse rules.

MARKET ORDER: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring or pit.

MINIMUM PRICE FLUCTUATION: Smallest increment of price movement possible in trading a given contract.

NEARBYS: The nearest delivery months of a commodity futures market. The contract month closest to expiration in any given commodity is the nearby contract.

OFFER: An indication of willingness to sell at a given price; opposite of "bid."

OFFSET: Liquidating a purchase of futures through the sale of an equal number of contracts of the same delivery month, or the covering of a short sale of futures through the purchase of an equal number of contracts of the same delivery month.

OPEN INTEREST: The sum of futures contracts in one delivery month or one market that has been entered into and not yet liquidated by offsetting transactions nor fulfilled by deliveries.

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OPENING, THE: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening."

PAPER PROFIT: The profit that would be realized if the open contracts were liquidated as of a certain time or at a certain price.

PIT: A specially constructed arena on the trading floor of some exchanges where trading in a futures contract is conducted. On other exchanges, the term "ring" may designate the trading area for a commodity.

POSITION: An interest in the market, either long or short, in the form of one or more open contracts. The purchase of a contract would enter a "long" position; the sale of a contract would enter a "short" position.

POSITION LIMIT: The maximum position, either net long or net short, in one commodity future or in all futures of one commodity combined which may be held or controlled by one person as prescribed by an exchange or by the CFTC.

RANGE: The difference between the high and low price of a commodity during a given period of time.

REALIZING: Accepting a profit or loss by liquidation or covering of an established futures position.

REPORTING LEVEL or LIMIT: Sizes of positions set by the exchanges and/or the CFTC at or above which commodity traders and brokers who carry their accounts must make daily reports as to the size of the positions by commodity, by delivery month, and whether the position is speculative or hedging.

RESTING ORDER: An order to buy at a price below or sell at a price above the prevailing market that is being held by a floor broker.

ROUND TURN: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. Commissions charged by brokers in commodity futures are charged only at the completion of the round turn.

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SCALE DOWN (or UP): To purchase or sell on scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.

SETTLEMENT or SETTLING PRICE: The daily price at which the clearing house clears all trades and settles all accounts between clearing members for each contract month. The settlement price is established daily at the close of the trading session, after which all trades must be cleared before the next day's session. Settlement prices are used to determine both margin calls and invoice prices for deliveries.

SPOT: Market of immediate delivery of the product and immediate payment. Also may be used to refer to the nearest delivery month in futures.

STOP ORDER: An order that becomes a market order when a particular, stipulated price level is reached. A sell stop is placed below the current market; a buy stop is placed above the current market. The stop order may also be used as a "stop?loss" order.

STOP LIMIT ORDER: Like the stop order, this order goes into force only when there has been a trade somewhere in the pit at the stipulated price level. But the stop limit order, however, can only be filled at the stop limit price or better.

TECHNICAL ANALYSIS: An approach to analysis of futures markets and likely futures trends of commodity prices which examines patterns of price change, rates of change, and changes in volume and open interest. This data is often charted.

TENDER: The act of giving notice to the clearing house of intention to initiate delivery of the physical commodity in satisfaction of the futures contract.

TRADING LIMIT: (1) The maximum quantity of a commodity future which may be purchased or sold by one person during one trading day; (2) The maximum futures position any individual is allowed to hold at any time under CFTC regulation; (3) The price above or below which trading is not allowed during any one day.

VOLUME OF TRADE: The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or in total of physical units. Note that volume is not the same as open interest.

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