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Reading Prices
Welcome to the confusing world of commodities.
Most trades are carried out by buying and selling futures
contracts, rather than trading directly in the commodity. And
most futures contracts trade more or less like stocks or bonds,
with the key exception that they have an expiration date.
Nevertheless, some of the mechanics of trading can still be
confusing to the novice. One of these is the most basic item of
information: price quotes.
Gold
Because of advertising, its accessibility, and the historical
allure of gold, this commodity will be one that most novice
commodity traders take an early interest in. Price quotes are
fairly straightforward, with just a few wrinkles.
Gold price movements have a minimum set by the exchanges. Gold
futures, for example, traded on COMEX (Commodity Exchange of
New York) have a 10 cent minimum 'tick' (price movement) as
it's called. Since each futures contract covers a 100 troy
ounces, that makes the minimum price movement for a contract
$10. That's a significantly larger movement than the average
stock investor may be used to, where prices typically move by
ten to twenty-five cents per share.
Quotes will often be shown without the dollar sign, and
sometimes the decimal point is also left out. So, a price of
$580.65 per troy ounce of gold may be shown as: 58065.
Normally, it will be displayed as 580.65.
Natural Gas
Traded on NYMEX (the New York Mercantile Exchange), here the
minimum price change is 1 cent. Prices are quoted in dollars
per million metric British Thermal Units (mm BTU). A BTU is a
measure of energy produced by burning natural gas.
The standard futures contract size is 1,000 mm BTU. So, a price
movement from, say, $35.50 to $36 would represent an increase
of $.50 x 1,000 = $500.
Live Cattle
Live cattle futures are traded on the CME (Chicago Mercantile
Exchange), one of the oldest and largest in the U.S. Prices are
quoted in cents per hundred weight, with a standard contract
covering 40,000 hundred weight.
The tick (minimum price movement) is 0.025 cents, and a
movement from 71.125 to 72.125 would be calculated as
follows:
71.125 is read as 71.125 cents per hundred weight. So, a common
price change would look like:
$0.72125 - $0.71125 = $.0100
$0100 x 40,000 = $400.
Coffee
Coffee is one of several commodities known as a 'soft', a
category used to distinguish it from metals, energy, grains,
etc. Traded on the appropriately named Coffee, Sugar and Cocoa
Exchange (CSCE), the price is quoted in cents per pound. The
standard contract size covers 37,500 pounds.
Since, the minimum change (the tick) is 0.05 cent, a contract
price changes by: $0.0005 x 37,500 = $18.75. A price listed as
115.45 is equivalent to 115.45 cents per pound, or $1.1545 per
pound.
Corn
Corn is one of several grains traded, and possibly the one with
the longest history. Corn has been harvested for thousands of
years, and formed one of the earliest 'forward' contracts.
Prices are quoted in cents per bushel, with a minimum price
change of 1/4 cent. The standard contract covers 5,000 bushels.
A price quoted as 290 would be equivalent to $2.90 per
bushel.
Hence a contract price change from 290 to 291 would equal:
$2.91-$2.90 = $0.01
$0.01 x 5,000 = $50.
Take a moment to absorb that. A one cent movement in the price
of the commodity affects a single contract owned by fifty
bucks. Quite different from stocks or bonds.
Commodity prices move fast and they often move far in a single
day. That makes commodity trading one of the most volatile, and
hence risky, markets traders can engage in. Be ready for a real
adrenaline pumping experience when you get involved.
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