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I understand the basic concept behind investing in a company via stock purchases: you get some minuscule percentage of the company, and get to benefit from that ownership.

Investing in commodities (eg corn, oil, etc) seems to be quote different - as they are done on a per-contract basis (November soybeans, for example).

How do they actually vary, and what happens if I buy a November soybeans contract today (May)? Do I have to sell it in November because it will have come due? Or do I hold onto it as long as I want it (like i would with a stock), or is it something else entirely?

  • A November soybeans contract is a contract to either deliver the named quantity of soybeans in November to whomsoever holds the other end, or accept delivery of the named quantity of soybeans in November from the other party. If you are not a agribusiness dealer with large silos and haven't sold the commodities future by the due date, you are in a heap load of trouble. You invest in a stock, you speculate in commodities. Betting right can make you a lot of money in commodities, betting wrong can lose you a lot. Be wary and have an iron stomach if you go into commodities. – Dilip Sarwate May 7 '12 at 15:55
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As Dilip has pointed out in the comment, investing in commodities is to either delivery or Buy. Lets say you entered into buying "X" quantities of Soybeans in November, contract is entered into May. In November, if the price is higher than what you purchased for, you can easily sell this, and make money. If in November, the price is lower than your contract price, you have an option to sell it at loss. If you don't want to sell it at loss, you are supposed to take the physical shipment [arrange for your own transport] and store it in warehouse. Although there are companies that will allow you to lease their warehouse, it very soon becomes more loss making proposition. By doing this you can HOLD onto as long as you want [or as long as the good survive and don't rot]

It makes sense for a large wholesaler to enter into Buy contracts as he would be like to get known prices for at least half the stock he needs. Similarly large farmers / co-operative societies need to enter into Sell contracts so that they are safeguarded against price fluctuations.

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