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Commoditiy Trading - Financial Indexes

Aug 29, 2007
Although it might not stand to commonsense, stocks and bonds can indeed be traded as commodities. Especially if you're novice investor, you probably don't see that the statistical measurements of changes in price are similar to those of gold, wheat or oil. However, these trade in the form of futures and options contracts; this is because stocks and bonds, and the indexes that measure price changes, trade within the form of futures and options contracts. Therefore, they can be traded just as other commodities are.

Oil is still the most traded physical commodity. It is the largest of all contracts traded in the financial futures market today. One of the most popular of these is the contract for the Standard & Poor's 500 Index, or the S&P 500.

The S&P 500 is the gold standard of indexes. Therefore, it gives traders a broad view all the entire stock market. The companies listed within the S&P 500 represent 80% of the entire market capitalization. The top 40 stocks in the S&P 500 represent 50% of the total market.

This means that traders can be confident that there will be no problems with liquidity, as can sometimes happen within other commodities.

In general, this also means that risk is easier to assess. The tools used to predict the S&P 500 are more reliable than others; this is because stock prices are generally easier to predict that commodities prices. The S&P 500 stocks included therein also have offered the highest return over a 30-year period, historically, when compared to other types of investment. Generally, return has been around 12%, depending on the range selected.

Stock prices can most certainly be volatile. There have been a few large single day price drops. However, by design, indexes typically move less and not as rapidly as other prices do. When one uses of broad-based index, this "smooths out" the fluctuations of individual stocks, so that it's easier to see an assess the direction of the market in its entirety.

Kept this is beneficial because along with reduced risk and better predictability, traders have the same advantages they find when they use futures and options as trading vehicles. Margin percentages generally run in the 5 to 7% range, so that high leverage is still available. This makes it comparable to other commodities futures and options contracts.

Commodities trading is typically oriented to the short-term; here, day trading the typical set up. However, with index trading, investors can use those sharp swings to their advantage; even so, they can still have a long-term view of the horizon, just as they would if they were doing stock investing.

One common trading strategy is called the rollover. With rollover, traders can take a long position on a futures contract. As the expiration nears, they can transfer their position to another contract; the new contract as an expiration date that is beyond the one in their current contract.

By using this type of "spread" strategy, traders can take advantage of price differentials and low commissions even as they exert control over the liquidation date. The trade is executed when traders predict that prices will soon move in the preferred direction, meaning just beyond the expiration date.

S&P Index futures are traded on the Chicago Mercantile Exchange, or CME. There's also an S&P 500 "E-mini" contract available; a set of contract carries a much smaller commitment, with a size that is one fifth of the standard contract. The trade unit is $50 times the S&P 500 index. The trade unit for the standard contract is $250 times the S&P 500. In addition, everything is traded electronically, with no open outcry or pit trading. This means that trading hours have been extended from those typically limited to the hours of the stock exchange to a 24-hour trading day.

The CME web site, at http://www.cme.com, has more information, including contract specifics and current prices.
About the Author
Visit 123OnlineTrading.com - Commodities, Stocks, Forex to find books, tips and advice about online commodity trading . Besides a large selection of free educational articles you can also find powerful books about online trading in general.

Other Resources:
123OnlineCommodityTrading.com - Commodity Trading Links
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