Commodities and Financial Indexes Trading

Stock and bonds aren’t usually viewed as commodities by beginner investors. Even price fluctuations are not viewed in the same way they are with commodities. However stocks and bonds (and the indexes that measure price changes) can be traded in the same way as other commodities as they are able to be traded in the form of futures and options contracts.

When talking physical commodities, oil remains the most highly traded, however the financial futures market today is the largest for all contracts traded. The Standard and Poor's 500 Index, the S&P 500 is one of the most popular contracts.

Considered to be the ‘gold’ standard of indexes the S&P gives traders an extensive view of the stock market as a whole. The companies contained in the S&P 500 represent 80% of the entire market capitalization - the top 40 stocks in the S&P 500 represent 50% of its total.

Unlike with other commodities, that means traders can be confident that there will be no liquidity problems.

Risk is also easier to assess as the tools available to measure and predict the S&P 500 are more reliable, because predicting stock prices is much easier than that of commodities. Easier, but by no means simple. Just as one example, the stocks in the S&P 500 have reliably offered the highest return over a 30 year period of any investment, around 12% depending on the range selected.

Volatility with stock prices is not unusual, and large single-day price drops have happened several times. However, by design, indexes typically move less drastically and less rapidly than other prices. Utilizing a broad based index helps to smooth out the bumps of individual stocks, in order to assess the direction of the market as a whole.

However traders are still able to enjoy other advantages when using futures and options as trading vehicles despite the reduced risk and better predictability. Margin percentages are in the 5-7% range, so high leverage is still available, as it is with other commodities futures and options contracts.

Day trading is often used with commodities making it very short-term oriented. But with index trading, investors can take advantage of those sharp swings, while still taking a long-term horizon view, as they would with ordinary stock investing.

The 'rollover', for example, is one common trading strategy. This method allows traders to take a long position on a futures contract, then - as expiration nears - transfer the position to another contract with an expiration date farther out into the future.

This 'spread' strategy controls the liquidation date while taking advantage of price differentials and low commissions. It's executed when traders predict that prices will soon move in the preferred direction, where 'soon' is just beyond the expiration date.

The CME (Chicago Mercantile Exchange) trades on S&P Index futures, where the trade unit for a standard contract is $250 times the S&P 500. However there's an S&P 500 'E-mini' contract available, which carries a smaller commitment - one-fifth of the standard contract. The trade unit for this is $50 times the S&P 500 Index. Another advantage is that trading can be done at almost any time, seeing as all trades are completed electronically, with no open outcry or pit trading.

For current prices and contract specifics, see the CME website at http://www.cme.com/.