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| Investors looking for a fast-paced dynamic market with excellent
liquidity that can act as a counterweight to the stocks and bonds
in their portfolio will want to learn more about the New York Mercantile
Exchange futures and options markets. |
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| The challenge in meeting this price volatility takes place in the
vigorous give-and-take among the traders on the New York Mercantile
Exchange where the best up-to-the minute price emerges from their
consensus. The price quotations are then used as benchmarks by buyers
and sellers in the energy and metals markets worldwide. |
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| Futures prices are not price predictions, but are the collective
current opinion of the marketplace of where prices appear to be heading.
That opinion, and the direction of prices, can change in an instant,
which makes trading these markets so challenging and potentially rewarding. |
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| A Market Open to All |
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| NYMEX is a public market forum and anyone can play a role in these
vital global markets. Participation is not difficult, but a few requirements
must be met. The first step is to open an account through a licensed,
Series 3, commodity futures broker. |
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| Finding the Right Broker |
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| The broker will be your point of entry to the markets, so make your selection with the same care and due diligence as you would any other financial services professional upon whom you rely. |
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| The broker you choose should serve a clientele geared towards your level of trading. Some brokers mainly deal with commercial and institutional customers, some with individuals of high net worth, while others primarily serve smaller investors. |
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| Brokers offer different levels of service: |
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- A full service brokerage firm will be able to offer advice on investments and strategy, provide research, and contact you regularly with trading advice. A full-service brokerage could be especially useful if you are following many markets. The fees at a full service firm are usually higher than other types of firms.
- Discount brokers offer limited services and charge lower fees. Investors who do their own research and are confident in their trading abilities often find that discount brokers meet their needs.
- Introducing brokers are full service firms which execute the buy and sell orders through the large well-known financial houses which are clearing members of the Exchange. Introducing brokers are usually found in smaller cities and, while they may not have the name recognition of a big Wall Street firm, their service is often top-notch.
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| Once you decide on the type of broker fits your needs and abilities how do you know who is reputable? |
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| The first place to check is with the National Futures Association which keeps records of any disciplinary actions against brokers. Through its online system, Background Affiliation Status Information Center (BASIC), NFA makes available registration information and futures-related actions contributed by NFA, the Commodity Futures Trading Commission (CFTC) and the U.S. futures exchanges. For registration information that is not available in BASIC, contact NFA's Information Center at (800) 621-3570. |
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| The NFA plays an important role in the futures industry's self-regulatory responsibilities by screening all firms and individuals wishing to conduct business with the investing public. NFA's activities are overseen by the CFTC, the government agency responsible for regulating the U.S. futures industry. |
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| Virtually every firm or individual who conducts commodity futures or options business with the public, must be a member of NFA and registered with the CFTC. NFA performs the registration process on behalf of the CFTC. NFA Member categories include: Commodity Trading Advisors (CTA), Commodity Pool Operators (CPO), Futures Commission Merchants (FCM) and Introducing Brokers (IB). |
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| The NFA also maintains a data base of futures-related information, including CFTC registration information and NFA membership information. |
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| Once you have selected a broker, he will need to know certain information: |
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- Your financial situation.
- Your experience in trading commodity futures and options.
- Your tolerance for risk.
- Your risk management or investment objectives.
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| Each commodity trading account can have its own characteristics and be structured to the trader's needs. Brokers are engaged in a highly competitive business and customers may find that commissions are negotiable. |
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| Many brokerage firms have streamlined the process of opening an account by making the required forms and documents available through their websites. |
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| Read all paperwork including the disclosure forms carefully and fill out the forms as accurately as possible; do not overstate your income. |
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| If the brokerage firm is not also a clearing member of the Exchange, it must have a relationship with a clearing member. The broker should have the proper forms and be able to help you fill them out to establish your account, including your margin account with the clearing member. Clearing Member List |
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| Margin Accounts Are a Must |
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| All market participants on the New York Mercantile Exchange must
have a margin account with a NYMEX clearing member before they can
transact any business on the Exchange. Many clearing members provide
brokerage services, too. |
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| Unlike the stock market, where "margin" refers to borrowed funds,
margin in the commodity futures and options markets represents a performance
bond - a "good faith" deposit - which can be used to cover adverse
movements in prices for futures and short options positions. In order
to protect market participants and the integrity of the overall market,
the Exchange must ensure that participants have sufficient funds to
handle losses. Margins are set by the Exchange based on its analysis
of price risk and volatility in the market at that time. Margins are
established at sufficiently high levels to adequately guard against
market participants becoming over-extended as prices increase and
decrease as market conditions change. The margin is not partial payment
on a purchase. |
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| The margin requirement also does not represent the value of the
position which makes you responsible for a lot of product with a relatively
small amount of money. For example, the initial margin required to
open a position in a gold futures contract may be approximately $2,500
to $3,375, while the futures contract represents a quantity of gold
that at the same time could be valued at approximately $90,000. This
type of leverage can lead to quick and substantial profits - as well
as losses. In fact, it is possible to lose more than the amount of
money you've deposited so if the markets start moving against you,
it is important to know when to cut your losses. |
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| All positions on the New York Mercantile Exchange are marked-to-market each day by calculating the gain or loss in each contract position resulting from changes in the price of the futures or options contracts each trading day. If the equity in a customer's account drops to or under an amount predetermined by the Exchange, the clearing member must issue a margin call for the customer to restore his equity. Positions that show a gain receive a payment from the clearinghouse. |
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| Stepping Up to the Big Leagues |
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| OK, you've selected a broker and opened a margin account. Now it's time to put your market theories to the test. How do you do it? |
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| Trading at NYMEX presents an intellectual and strategic challenge
to those willing and able to take the risk. Trading can be executed
through different financial instruments and venues, making NYMEX's
markets extremely flexible and useful to a wide range of market participants
which benefits everyone. The more participation, the greater the liquidity
of the market and the more competitive the bids to buy and offers
to sell. |
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- The overwhelming majority of NYMEX trading activity is executed
via electronic trading. NYMEX also provides two trading floors
where open outcry trading takes place. All floor traders, whether
acting as a broker on behalf of a customer or trading for their
own account, must be a member.
Open outcry is a vigorous, often frenzied auction where each participant
announces his bid or offer to the market at large, and receives
responses from brokers willing to take the other side of the trade.
- Energy and metals futures and options contracts are available
for trading and clearing on the CME
Globex® and NYMEX ClearPort platforms when the trading
floor is closed, making the markets available for a more than
23 hours a day. To trade electronically, one must have an account
with a clearing member and be registered as a user.
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| A Time to Hedge, a Time to Speculate |
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| Hedgers and speculators - also called investors - have divergent goals, which is why their presence in the markets complements each other so well. |
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| Hedgers do not necessarily seek to profit in the futures markets. They use the futures to help stabilize the revenues or costs of their business operations because they have an offsetting position in the physical market. A gain or loss in the futures market is usually offset to some degree by the corresponding loss or gain in the market for the underlying physical commodity. |
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| Speculators, to the contrary, do seek to profit from market movement because they do not have offsetting physical positions. However, for every speculator who tries to profit from a rising market there are those who believe they can profit in a falling market. Most speculators don't try to push the market in any direction - a fool's errand if there ever was one - instead they follow the trend, attempting to time their transactions by buying low and selling high - or first selling high and later buying back low. This flexibility to initiate a strategy as either a buyer or a seller, depending on your view, is one of the beauties of the futures markets. |
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| By taking positions in the expectation of making a profit, investors fulfill a critical market role in providing the liquidity that hedgers need to easily enter and exit positions. |
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| What is the Best Way to Figure Out What the Markets May Do? |
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| Some traders like to keep track of market fundamentals, the nuts and bolts of supply and demand. Is the weather too hot or too cold? Are there reports of production problems or surpluses? Are jewelry sales brisk or stagnant? Such developments in the underlying markets are often indicators of how prices may move. |
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| Other traders study the technical reasons for price movements by using computer programs and examining charts of the market's performance for clues as to whether a buying or selling trend can be expected to continue or is due for a reversal. |
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| NYMEX futures and options contracts are available for trading for
many months in the future - years in most cases. As a practical matter,
the most actively traded and volatile contract months are those that
are within a few months of a contract's expiration. As the expiration
date of the contract draws closer, volume often picks up as activity
in the futures market more closely resembles activity in the cash
markets for the underlying commodity. |
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| Most of the energy and metals futures contracts that trade are physically
delivered contracts, although less than 1% of the commodities traded
are actually bought or sold through NYMEX. Giving market participants
the alternative of delivering through NYMEX, however, ensures that
the futures prices will reflect the underlying market. Concerns over
physical delivery obligations can be avoided by utilizing full-sized
or NYMEX miNY™ financially-settled futures. |
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| If you need further information about NYMEX or its markets, you
are likely to find it elsewhere on this website. Your broker can also
be a good source of information, or e-mail the Exchange at exchangeinformation@NYMEX.com. |