Commodity Trading Adviser Firms and Funds Key Terms

Key terms you need to know when looking for a commodity trading adviser

Commodity trading adviser firms are comprised of highly educated professionals that are licensed and must be members of the National Futures Association. These firms help investors buy and sell commodities. The advisers are money managers in the strictest sense. Customers rely on them for advice on understanding the various aspects of trading, such as structuring trades and selecting markets. They can help you determine whether this type of trading is a good idea for you as they evaluate your risk tolerance. Advisers are usually experts in trading stocks and bonds before they begin trading commodities.

Base commodities

A base commodity is a tangible product or basic resource such as petroleum, sugar, soybeans, aluminum, gold and silver. The price of the commodity is set as a function of the market it is in. Another feature of commodities is that there is no qualitative difference in the products across a market. A commodity trading adviser firm can help you reduce your exposure if you decide you want to invest in this market.

OTC derivatives

Over the counter (OTC) derivatives are contracts that are traded between parties directly and do not need to go through an exchange. This market is unregulated. It is made up of banks and hedge funds and disclosure of information is not required between the parties trading these contracts. Commodity trading adviser firms can be especially helpful in explaining the risks associated with these instruments.
University of Cincinnati has a definition of OTC derivatives that is more detailed.

Carbon emission credits

Carbon emission credits are derived from an approach referred to as emissions trading and which is used to control pollution. A government sets a cap or limit on how much pollution can be produced by a company or group. These organizations are issued permits and are obligated to hold credits that are equivalent. These credits can then be sold and traded. Commodity trading adviser firms can assist you, if you determine you want to trade in these credits.
Ecobusinesslinks.com has done a wide-ranging comparison of various organizations that provide carbon credits.

Operational or market risk

Values of investments such as commodities, stock, foreign exchange and interest rates change or decrease; this is what is called operational or market risk. This most basic form of risk is what commodity trading adviser firms and funds try to manage.
If you want to be more educated on this important aspect of trading, check out the comparison between market risk and business risk at riskexpertise.com.

Hedging strategy

A hedging strategy is a carefully developed plan for establishing a position in one market so as to offset the risk of an equal position in another market. A commodity trading adviser can help you determine if this strategy is right for you.
To find more information about the facts related to this strategy, check out: Magnum Global Investments.

Derivatives

Derivatives are financial contracts that come from a source such as real estate, bonds, stock and interest rates to name a few. The value of a derivative comes from the underlying value of these assets. The types include futures, options, swaps and forwards. Commodity trading adviser firms have expertise in these highly complex instruments.
Mt. Rushmore Securities provides a good definition and some examples of derivatives.