How to Invest in Cotton Futures
With the 2011 flooding and hurricane activity in some of America's prime cotton-growing areas in the deep South, the price of cotton has seen remarkable volatility. There has been substantial trading in futures as textile manufacturers seek to lock in prices to protect themselves from future price increases. This combination has been a boon to some investors willing to take substantial risks to trade in cotton futures contracts.
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Instructions
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Open an account with a broker who specializes in option contracts. This broker will need to have a Series 7 license to sell individual securities. You can choose to pay a higher commission to get more assistance with your trading strategy and tactics, or you can do your own research and use a discount broker for less.
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Deposit money in your brokerage account.
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Decide on a leverage strategy. With futures contracts, you only need to deposit a fraction of the full amount of the transaction. Each futures contract represents an interest in 50,000 pounds of cotton. If the current price of cotton is $1 per pound, each contract totals a commitment to purchase $50,000 worth of cotton. However, you may only need to put up 15 percent of that figure, or $7,500. However, if the price of cotton moves unfavorably, you may wind up losing more than you invest. The more leverage, or borrowed money, the greater your potential gains, but the greater your potential losses as well.
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Purchase a contract through your broker. You can purchase cotton futures with expiration dates from between one month and one year from the purchase date. Choose an expiration date on which you expect to have cash available to cover any losses you may incur.
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Tips & Warnings
Futures investing is a notoriously volatile market. You can potentially lose your entire investment very quickly. If you use leverage, or margin, you could actually lose more than the amount you have invested.
