Getting Started in Commodities

Chapter 3

Commodity Trading in the Stock Market

Ask a stockbroker about the dos and don'ts of commodity futures trading and you're likely to get a laundry list that includes a lot more. The inherent risk of leverage will undoubtedly be high-lighted as well as the volatility of commodity prices. It's a safe bet the broker will end up asking why you'd want to trade commodity futures when you could invest in commodity stocks instead.

Commodity Research Bureau

established in 1934, the CRB is a provider of market information for commodities and futures prices.

But are commodity futures really all that risky? Wharton finance professor, Gary Gorton, and finance professor at the Yale School of Management, K. Geert Rouwenhorst teamed up to research this very issue. Their findings indicate that commodities aren't that risky. Their paper, entitled, “Facts and Fantasies about Commodity Futures,” examined the risks and returns of commodity futures, stocks, and bonds over nearly five decades. To measure risk, the researchers built an index from data maintained by the Commodity Research Bureau, which has tracked futures contract prices since 1959. The index covered more than three dozen domestic and foreign commodity contracts—from aluminum to zinc—traded between July 1959 and December 2004. As each contract expired, a new one was acquired to maintain continuity. Holdings were rebalanced every ...