Wondering how to invest in wheat futures? Here's everything you need to know, from what a future is and how it works, to strategies for trading them.

Wheat futures are an interesting investment opportunity, but they’re also complex and can be risky. In order to help you decide if wheat futures are a good investment for you, we’ll break down what they are, why people invest in them, and how to make smart investments in wheat futures.

What are futures?

A futures contract is a type of financial contract in which two parties agree to exchange a set of financial instruments or physical commodities at a particular price in the future.

Futures contracts are standardized by serving as a contract between two anonymous parties. The contracts are traded on a futures exchange, which acts as an intermediary between the two parties.

The buyer of the contract agrees to purchase the underlying asset, and the seller agrees to sell the underlying asset, at a future date and at a price specified in the contract. Futures contracts are used for hedging purposes and for speculative purposes.

For example, a producer of corn may use a corn futures contract to hedge against the risk of a decline in the price of corn. A speculator may use a corn futures contract to bet on an increase in the price of corn.

If the price of corn increases, the speculator will make money; if the price of corn decreases, the speculator will lose money. Futures contracts are also used to facilitate transactions in physical commodities.

For instance, if a farmer wants to sell his crop of corn in December, but he doesn’t want to wait until then to receive payment, he can sell his crop through a corn futures contract.

The farmer will receive payment immediately, and the buyer of the contract will take possession of the corn when it is harvested in December.

Why do people invest in futures?

Many people invest in futures contracts in order to speculate on the future price of a commodity. For example, if someone believes that the price of gold will increase in the future, they may buy a gold futures contract.

If the price of gold does indeed rise, then the investor will be able to sell their contract for a profit. However, if the price of gold falls, then the investor will incur a loss.

Some people also invest in futures contracts as a way to hedge against price fluctuations.

As an example, if a manufacturer is concerned about the potential for rising steel prices, they may purchase a steel futures contract in order to lock in a set price for the steel they will need to purchase in the future.

In this way, futures contracts can help to protect businesses from unexpected changes in commodity prices.

How to invest in wheat futures

Investing in wheat futures contracts can be a great way to hedge against inflation or protect your farm’s production costs. But before you start buying and selling wheat futures, there are a few things you need to know. Here’s a step-by-step guide on how to invest in wheat futures contracts:

1. Understand the basics of wheat futures contracts

A wheat future is a contract that obligates the buyer to purchase a specific quantity of wheat at a predetermined price on a specified date in the future. Wheat futures are traded on the Chicago Board of Trade (CBOT).

2. Determine your investment objectives

Are you looking to hedge against inflation or protect your farm’s production costs? Or are you simply trying to make money by speculating on the price of wheat? Knowing your investment objectives will help you determine which wheat futures contract is right for you.

3. Choose a broker

You’ll need to open an account with a broker that offers access to the CBOT. Not all brokers offer access to the CBOT, so be sure to ask before opening an account. For futures investing, I highly recommend TD Ameritrade.

4. Place your order

Once you’ve chosen a broker, you’ll need to place an order for the specific type of wheat futures contract you want to buy. Be sure to include the price, quantity, and delivery date in your order.

Beginner mistakes to watch out for

Even though I’ve just mapped out a simple process for investing in futures, it’s still fairly complex. Here are some of the beginner mistakes you should watch out for when buying futures:

1. Buying a futures contract when you don’t have the money to cover it

One of the biggest dangers is that you could end up owing money to the exchange if the price of the underlying asset falls below the level stipulated in the contract.

This is known as a margin call, and it can quickly leave you in debt if you don’t have enough money to cover it. In addition, futures contracts are often traded on margin, which means that you only have to put down a small percentage of the total value of the contract.

This can amplify your losses if the market moves against you, so it’s important to be aware of the risks before entering into any trades.

2. Not understanding how the contract works

Another one of the key risks associated with futures contracts is not understanding how they work. Unlike other financial instruments, futures contracts are not standardized, which means that there is a lot of room for customization.

This can be beneficial for traders who have a clear idea of what they want to achieve, but it also means that there is more room for misunderstanding.

For example, if you enter into a futures contract without fully understanding the terms, you may find yourself inadvertently locked into a position that you cannot exit without incurring significant losses.

This is why it is so important to take the time to learn about how futures contracts work before entering into any trades. By doing so, you can help to protect yourself from making costly mistakes.

3. Not picking a broker that offers access to the futures market

If you’re thinking about trading futures, it’s important to choose a broker that offers access to the futures market. There are a few reasons for this:

  1. The futures market is highly regulated, so you’ll need to have a broker that’s registered with the Futures Commission Merchant (FCM) and is a member of the National Futures Association (NFA).
  2. The futures market is very complex, so you’ll want to make sure that your broker has experience and knowledge in this area.
  3. Because the futures market is constantly changing, you’ll need a broker that can provide you with up-to-date information and research.

Choosing a broker that doesn’t offer access to the futures market could result in missing out on profitable opportunities or making costly mistakes.

Again, we strongly recommend TD Ameritrade for trading futures, because they make the entire process simple.

4. Placing an order without knowing all the details

Before entering into any futures contract, it’s important to know all the details of the contract. This includes the risks involved, as well as the potential rewards.

Otherwise, you may find yourself in a situation where you’re not fully aware of the terms of the contract, and this could lead to losses.

For example, if you’re trading a commodity futures contract, you need to be aware of the price movement of the underlying commodity. If the price moves against you, you could lose money.

Similarly, if you’re trading a currency futures contract, you need to be aware of changes in exchange rates.

Again, if the rates move against you, you could lose money. Therefore, it’s essential that you understand all the risks involved before entering into any futures contract.

Should you invest in wheat futures?

Many people think of wheat as simply a staple food, but it is also an important commodity with a lively futures market. There are several reasons why you may want to invest in wheat futures contracts.

  1. Wheat prices have been trending upward in recent years, due to strong global demand.
  2. Wheat is a relatively volatile commodity, which means that there is the potential for large price swings. This can create opportunities for investors to make sizable profits.
  3. The Wheat Futures market is highly liquid, which makes it easy to buy and sell contracts.

For these reasons, wheat futures can be an attractive investment for people who are looking to diversify their portfolios.

Why you may want to avoid wheat futures

While wheat futures may be a great opportunity for some, it’s not for the faint of heart. Here are some reasons you may want to avoid investing in wheat futures.

  1. The price of wheat is highly volatile and can fluctuate dramatically in a short period of time. This means that it can be difficult to predict when the price will go up or down, which can make it challenging to make money on your investments.
  2. The wheat market is often subject to speculation and manipulation by large traders who can move the price of wheat up or down at will. This can create an environment of uncertainty that makes it difficult for small investors to profit.
  3. The costs of storing and transporting wheat can add up quickly, eating into any profits you might make.

Summary

Now that you know how to invest in wheat futures contracts, it’s time to start planning your investment strategy.

Remember, wheat futures can be a great way to hedge against inflation or protect your farm’s production costs.

But like any investment, there’s always risk involved. So be sure to do your research and consult with a financial advisor before making any decisions.

About the author

Chris Muller picture
Total Articles: 231
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.