Keyword: what are commodity futures for beginners
When I first started exploring the world of commodities, I kept coming across one term over and over: futures. Everyone seemed to be talking about them — especially when it came to oil, wheat, or gold prices — but I had no clue what they actually were.
So, like any curious beginner, I dove in. I read blogs, watched YouTube videos, and even tried a futures trading simulator (which, spoiler alert, was stressful). Through all that, I finally wrapped my head around the basics.
If you’re new to this and wondering what are commodity futures for beginners, this article is for you. Here’s everything I learned — explained in a casual, beginner-friendly way — including the “aha” moments, the confusing bits, and whether or not futures are something you should explore as a new investor.
What Are Commodity Futures (in Plain English)?
Let’s start super simple.
A commodity future is a legal contract to buy or sell a specific amount of a commodity (like oil, corn, or gold) at a set price on a future date.
Think of it like locking in the price of something now, even though you won’t actually buy or sell it until later.
A real-world example:
Let’s say you’re a farmer growing wheat. You worry wheat prices might drop by harvest time, so you sell a futures contract to lock in today’s higher price. Meanwhile, a bakery that needs a ton of wheat might buy that contract to make sure they don’t end up paying more later.
Boom — both sides have protected themselves from price swings.
My Wait… What? Moment: You Don’t Have to Take Delivery
One of my first questions was, Wait… if I buy an oil futures contract, am I supposed to store barrels of oil in my garage?
Thankfully, no.
Most futures contracts are never actually delivered. If you’re a retail investor, you’re likely to buy and sell contracts before they expire, making (or losing) money based on how the price moves — not on receiving actual commodities.
Still, that image of me surrounded by oil drums definitely helped cement the concept.
Why Do People Use Commodity Futures?
Once I understood the “what,” I needed to understand the “why.” There are two big reasons people use futures:
1. Hedging
This is all about risk management.
If you’re a business that needs to buy or sell a physical commodity (like an airline buying jet fuel or a farmer selling soybeans), you can use futures to lock in prices and avoid surprises.
2. Speculation
This is where traders come in. They try to profit from price changes — buying low and selling high (or shorting and buying low later).
This is more common among individual investors, and it’s where things get risky — and fast.
My First Try: Paper Trading a Futures Contract
Curious, I decided to try paper trading a crude oil futures contract on a demo platform.
Here’s what happened:
I “bought” a contract for crude oil at $75 a barrel.
A day later, oil dropped to $72.
I was down $3 per barrel, and since one contract is for 1,000 barrels, I was theoretically down $3,000.
Yikes.
Even though it wasn’t real money, I panicked. It taught me two things:
Commodity futures move fast.
You need to understand leverage.
The Role of Leverage (And Why It Scared Me)
One thing I wasn’t fully prepared for was how much leverage is involved in futures trading.
What is leverage?
Leverage lets you control a large contract with a small amount of money. So instead of paying $75,000 to buy 1,000 barrels of oil at $75 each, you might only need to deposit a margin of $7,500.
That sounds awesome — until prices move against you. Then your small deposit can disappear real fast, and you may even owe more than your initial investment.
That demo loss of $3,000? That was almost half of my “margin.” Had it been real, I would’ve been on the hook to either add more money or close my position at a loss.
How Are Futures Contracts Structured?
To give you a better picture, here’s what’s usually included in a futures contract:
The underlying commodity (e.g., corn, crude oil, gold)
The quantity (e.g., 5,000 bushels of corn)
The price (the agreed-upon rate)
The expiration date (when the contract ends)
Futures are standardized and traded on regulated exchanges like the Chicago Mercantile Exchange (CME). That means you don’t negotiate terms with other traders — everything is set by the exchange.
Common Commodities Traded as Futures
If you’re curious about which commodities people trade most, here are the popular ones I kept seeing:
Crude oil (CL)
Natural gas (NG)
Gold (GC)
Silver (SI)
Corn (ZC)
Soybeans (ZS)
Wheat (ZW)
Coffee (KC)
Each of these comes with different volatility, margin requirements, and trading hours. It’s worth researching one at a time if you’re interested.
Should Beginners Trade Commodity Futures?
Here’s my honest take after dipping my toes in:
Pros:
High potential returns due to leverage
Liquidity — popular futures contracts trade actively
Diversification — different from stocks and bonds
Cons:
High risk (especially if you don’t fully understand leverage)
Requires constant monitoring
Emotional rollercoaster — prices can swing wildly
What I Chose Instead
After my futures experiment, I realized that active trading wasn’t for me — at least not right now. I didn’t want to risk thousands just to learn how to “read the market.”
So instead, I turned to commodity ETFs, which are much more beginner-friendly.
Some I looked at:
- GLD – Tracks gold prices
- DBC – Tracks a basket of commodities (including energy and agriculture)
- USO – Tracks crude oil
These let me invest in commodities without managing futures contracts, worrying about expiration dates, or margin calls. It’s not as high-reward, but it’s way less stress — and a great entry point for beginners.
What I’d Tell Other Beginners
If you’re new and asking, what are commodity futures for beginners, here’s the summary I wish someone had given me:
- Futures are contracts to buy/sell commodities at a future date and price.
- They’re mostly used for hedging and speculation.
- They involve leverage, which can multiply gains — and losses.
- They’re not beginner-friendly without serious education.
- You don’t need to trade futures to benefit from commodities — ETFs are a great alternative.
Final Thoughts: Know What You’re Getting Into
- Commodity futures are fascinating. They offer insight into how the global economy works — from food prices to fuel costs to precious metals. I’m glad I took the time to learn about them.
- But when it comes to putting real money on the line? I’m sticking with investing, not trading, for now.
- That might change down the line if I gain more experience and risk tolerance. But for now, I’m happy watching the market from a safer distance — and keeping those imaginary oil barrels out of my garage.
Next Article To Read: How I Got Started with Agricultural Commodities