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Grains markets can be notoriously volatile offering high risk/reward opportunities for traders, with substantial gains and losses being commonplace.
The grains trade is the oldest market out there, likely predating recorded civilization by several millennia. For almost as long as we’ve grown grains, we have been trading them and while stocks, forex and hard commodities like gold and oil grab most of the attention these days, grains markets remain of great significance.
Unless they work for a company that processes significant amounts of grain, most traders operate in futures markets, rather than physical ones. Like all futures trading, this effectively involves speculating on what the price of the commodity will be at the time the contract is delivered.
This can be done via a number of exchanges across the globe, including the Sydney Futures Market, Chicago Board of Trade and the London Commodity Exchange. Most of the trading action centres on a handful of widely consumed grains, including: wheat, corn, soybeans, rice, and oats.
There are smaller markets for other types of grains as well, including barley and canola.
For many traders, one of the advantages of trading in soft commodities like grains is that it can be done for a relatively small capital outlay. Because these are tangible contracts representing actual physical commodities, brokerage firms are willing to lend at a lower margin, allowing for greater financial leverage.
Trading on leverage involves opening up a brokering account and opening up a margin loan. In commodity trading, this allows you to borrow most of the value of the contract, limiting your up-front capital contribution. This will amplify any gains significantly and exacerbate any losses.
As stated before, grains markets can move sharply and prices can swing significantly from one day to the next, which of course creates opportunities as well as dangers for traders. So what causes these price swings?
If futures trading isn’t for you, there are other ways to invest or trade in grain sector, including:
Learn how to trade commodities.
Grains trading is a potentially lucrative, though risky business, with numerous variables at play. Traders interested in delving into the space should do their research and carefully consider the downside risks. Given the complexities at play, many traders choose to focus on only one or two commodities, rather than diversifying across the market.
However, grains are just one of a number of options open to commodities traders, including oil, precious metals or coffee, among others. To find out more visit CMC’s Commodities Platform. Meanwhile, other investors prefer to focus on share markets, which can be done via the CMC Markets Invest page.