Trading copper offers many opportunities for investors to make gains. Copper futures are one way to trade copper, and they are a popular way to hedge risk while getting some experience trading the red metal.
But what should investors know before starting to trade copper futures? And what are the benefits of getting involved in the market? Here’s a brief overview of why people trade copper futures, how they do it and why it may be something you should consider.
Copper futures as an insurance policy
A copper futures contract represents 25,000 pounds of copper. Each contract is a firm commitment to make or accept delivery of a specified quantity and quality of the metal. Delivery is set for a specific month at a price agreed upon at the time the commitment is made.
Many investors see this as an “insurance policy” for their portfolio. Those who consume or produce copper can manage copper price risk by employing a short hedge to lock in a selling price for the copper they produce, or a long hedge to secure a purchase price for copper they know they will need.
To implement a long hedge, enough futures need to be purchased to cover the quantity of copper required by the business operator. The downside of long hedges is that if the price of copper ends up falling, the buyer would have been better off without the hedge.
Copper futures are also traded by speculators who take more of a risk in order to possibly profit from a favorable copper price movement. Speculators buy copper futures when they believe that copper prices will go up, and sell when they think prices will fall.
How are copper futures traded?
Investors should become familiar with copper market participants and consumers and do due diligence on market trends before attempting to trade. Knowing economic trends for regions that consume copper at a high rate gives investors an edge when taking bold positions on contracts. Additionally, keeping up with production and consumption news can keep investors well informed about the daily direction of the market, which is helpful in evaluating the direction copper may go.
Of course, consulting qualified futures brokers who specialize in industrial metals and who can read the direction of the market will bring added value to an investor’s decisions.
For those who choose to shy away from actual futures contracts themselves, there are still options available for trading. A good alternative to owning contracts is to utilize the iPath Bloomberg Copper Sub-Index Total Return ETN (ARCA:JJC), which tracks front-month copper futures. Even if its volume is low, ETNs can allow new shares to be put onto the market, preventing liquidity issues.
There are quite a few large players in the copper space that can be affected by copper futures, including Freeport-McMoRan (NYSE:FCX), Glencore (LSE:GLEN), Southern Copper (NYSE:SCCO), Rio Tinto (LSE:RIO,ASX:RIO,NYSE:RIO) and Anglo American (LSE:AAL).
Where to trade copper futures
Trading copper futures requires paying close attention to market fluctuations and remaining active in developing markets. Because copper moves within the market at high volatility, neglecting a position for even a short period of the day can be very costly.
You can trade copper futures on the New York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) and the Multi-Commodity Exchange (MCX).
NYMEX copper futures are traded through the Commodity Exchange (COMEX) division in units of 25,000 pounds. Contract prices are quoted in dollars and cents per pound.This exchange also provides another version of copper futures contracts that represents 12,500 pounds of copper. Prices are updated on a continual basis, giving real-time quotes and market activity for traders.
LME Copper “A” Grade futures prices are quoted in dollars and cents per metric ton and are traded in lot sizes of 25 tonnes (55,116 pounds). This exchange provides investors with more opportunity to trade globally in the copper market, which is vital if investors want to be where the majority of copper consumption and movement occurs (i.e. Chile, Peru and China). Currently, LME futures contracts are the second most popular, after the COMEX exchange.
The MCX, located in India, offers standard (1 metric tonne) and mini futures (250 kilograms) contracts for investors. Standard contracts occur in February, April, June, August and November.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.