With an unfair reputation of extremely high risk, investing in commodity futures has been left alone by the majority of investors.
Having said that, for those that don't take the time to learn the nature and overall behavior of commodities, they could lose a lot of money.
One of the first steps to understand is what a commodity future is in the first place, in order to successfully invest in the sector.
A simple and accurate definition of a commodity future is the agreement to acquire or sell a specific amount of a certain commodity at a set price and date.
That's why they're called futures.
One major reason buyers make these agreements is in order to reduce risks associated with price swings in any one commodity.
On the other hand, sellers do it so they can secure a price for their product.
So as far as commercial consumers and producers go, they invest in commodity futures in order to cut back on the risk of fluctuating commodity prices.
From an individual commodity investors' perspective, you're looking at the overall picture of supply and demand for a raw material, and make the best guess, based on known information, as to whether you think prices are going to rise or fall going forward.
Anyone doing their homework with commodity investing need to understand that they will experience losses with certain trades.
The obvious key is to have more wins than losses.
Because of the numerous variables, depending on the commodity you invest in, there is always going to be an up and down movement, and so a number of losses.
The point is to learn to manage your losses, ensuring you win more than you lose.
That's a subject for another time.
For now, understand what a commodity future is and its connection to supply and demand.
That is the foundation where you work from for successful futures trading.