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Understanding Liquidity in Commodities

By Benzinga

When it comes down to it, you trade for the money. But when you’re trading futures online, it’s hard to imagine how you can get your hands on cold hard cash.

Why Is Liquidity Important?

At its base, liquidity is the ability to turn your investments into cash. It involves the ease of being able to buy and sell an investment without having to wait or pay a significant penalty. High liquidity allows you to try to time a market and speculate in a particular form of investment.

Is Liquidity In Commodities Trading Different Than Other Types Of Trading?

Commodities' level of liquidity is significantly lower than other investments. This lack of liquidity results from the high amounts of leverage and large purchases inherent in commodities trading. Commodities trading and the futures market are both heavily leveraged, meaning every part works with borrowed money. This borrowing makes commodities trading inherently less liquid than other forms of investment.

However, borrowing and the futures market makes commodities trading more liquid than in the past. Traditional commodities trading involved swapping a large amount of corn or oil for each purchase. This is streamlined by the current commodities trading system. But, leveraging and borrowing adds more fees and time to accessing your money. This results in a reduction of liquidity for the commodities trader.

Trading Warning

If you’re new to futures trading, make sure to vet your commodities broker before engaging in commodities trading. Commodities are a complex field of investment; they can be a prime target for scammers. A lack of liquidity could point to a potential scam. Investors may not be able to give you your money for an extended period of time; They could be too busy spending your money.

Look at reviews and reports about the broker's history and record. Steer clear if the liquidity for the broker is considerably lower than comparable brokers.

Liquidity should be a factor in any investment decision along with cost, risk, and return. It's a significant factor for those who may have to spend money, put it in the bank, or invest further.

© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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