Differences between Stock and Commodity Futures Trading
Trading Stocks
When purchasing a share of stock in a company, generally speaking leverage is not used. Therefore, if the stock price goes up ¥1, the trader or investor gains ¥1 yen of profit. Conversely, if the price of the stock decreases by ¥1, the investor has a ¥1 loss.
Trading Commodities
In commodity trading, leverage is used. As an example, the TOCOM gold contract is levered at more than 25 to 1. The gold contract is 1 kilogram of gold. The price is quoted in 1 gram increments on TOCOM. The initial margin requirement is ¥105,000. If the price of 1 gram is ¥3,000, buying 1 contract allows the trader to control a total amount of ¥3,000,000 in gold (¥3,000 x 1000 (1 kg = 1000 grams) = ¥3,000,000). The initial margin required is ¥105,000 so the contract is levered over 25 times with a margin rate around 3.5%.(Data as of Sept.2009)
(Data as of Sept.2009)
If the price of 1 gram quoted on TOCOM rose ¥60, the trader would have a profit of ¥60,000 and a loss of ¥60,000 if the price decreased by the same amount (¥60 X 1000 = ¥60,000).
Risk Factors
Because commodity futures trading involves the use of leverage as mentioned above, the potential for large profits as well as large losses are much greater than in trading stocks. Additionally, investing in stocks can include income from dividends which are not a part of commodities trading.
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