Investors are always looking to diversify their portfolios. When done right, diversification lets them mitigate risk.
You can diversify your portfolio with stocks, bonds, or even trading commodity futures.
Although trading commodity futures can be risky, it’s been made much safer due to the CFTC, or Commodity Futures Trading Commission.
What’s the Commodity Futures Trading Commission, and how does it affect your commodities trading? Keep reading to learn all about the CFTC and why it’s so important.
What Is a Commodity?
To understand the CFTC, you need to understand commodities and how they are traded. A commodity is a basic good, often used as an input to produce other goods. There are two types of commodities: hard commodities and soft commodities.
Hard commodities refer to metal, ore, and energy products.
Soft commodities refer to grown products. Soft commodities are some of the oldest traded products in the world.
Examples of soft commodities include livestock, wheat, sugar, coffee, and fruit. Soft commodities tend to be more volatile than hard commodities. This is due to environmental factors that affect livestock and agriculture.
What Are Commodity Futures?
Commodity futures are contracts. A futures contract is an agreement to sell or buy a quantity of a specific commodity, at a specified price on a future date. Investors use futures as a way of speculating on the future price of an asset, with the hope that they make a profit.
What Is the Commodity Futures Trading Commission?
The Commodity Futures Trading Commission (CFTC) is an independent U.S. federal government agency. They protect the commodity futures market from fraud and manipulation.
The CFTC was created in 1974 when Congress passed the Commodity Futures Trading Commission Act. This was then signed into law by President Gerald Ford. This act replaced the Commodity Exchange Authority.
The CFTC’s duties include:
- Creating regulations
- Educating investors
- Prosecuting those who commit fraud
- Working with other external international bodies
The CFTC’s whistleblower program incentives individuals to come forward and report violations. Their Division of Enforcement investigates and prosecutes firms and individuals who violate regulations.
The responsibilities of the CFTC have changed and evolved over time as commodity options and trading have changed. Today the CFTC is even preparing to regulate cryptocurrencies.
How Can I Trade Commodities?
Like any investment or trading, trading commodities is not without risk. However, with some knowledge, you can understand the risks of trading and what influences prices. Make sure you understand trading futures basics before you find a broker and get started.
Look for a platform that has features such as algorithmic trading, a mobile app, and competitive fees.
Mitigating Risk With the CFTC
The Commodity Futures Trading Commission ensures that commodities are fairly traded. They prevent market manipulation, educate investors, and create and enforce regulations. Without them, trading commodities would be far riskier.
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