How to Buy Gas Futures
Natural gas powers a quarter of U.S. energy consumption and is consequently in high demand. Because of this, investment vehicles associated with natural gas are actively traded in many arenas. Futures contracts are under the commodities umbrella, and many forms of futures exist for the energy sector. Natural gas futures are one way of gaining exposure to the dramatic price action in this sector. As futures are highly leveraged instruments, gas futures can provide the investor or trader with a steeper risk-to-reward ratio than equities such as stocks or exchange-traded funds.
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Instructions
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Understand the nature of a futures contract before considering any futures trading activity. Unlike stock, which is actual ownership in a company, futures are speculative instruments specifically designed for trading. Traders specifically seek profit based on price action alone. Thus futures are designed to offer considerable leverage on their underlying instrument. The price of a single futures contract, for example, can sway based on the combined price swing of 10,000 MMBtu (which stands for a million of British thermal units) of natural gas.
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Apply for a futures trading account with any broker offering commodities contracts for trade. Such brokers are widely available, and many specialize only in futures. Some brokers also allow equity trading, but the best execution speed and platforms for active futures traders require a broker who emphasizes this arm of the industry in their services.
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Consider your objectives for the gas futures trade. Most futures traders actively buy and sell the contract, profiting from swings in price both up and down. Some investors, however, buy gas futures as a hedge against other positions. If you are primarily trading the futures short-term, this will likely involve a different contract than those seeking long-term speculation or portfolio protection.
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Determine which futures contract is appropriate for your trading needs. The New York Mercantile Exchange (NYMEX) handles the primary natural gas futures contract traded around the world. The symbol for this contract is NG. Multiple contracts are available under the NG umbrella, however. As all futures have an expiration date, the contract is further designated by the month and year of its expiration. For example, "NG.F10" is the gas futures contract expiring in January 2010. So-called "front-month" futures contracts are those that expire soonest, usually the current or next month. Short-term traders will interact with front-month contracts because they enjoy much higher trading volume and are thus more liquid. Longer-term traders may desire contacts with a long lifespan to hedge against other long-term investments in their portfolio.
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Buy the front-month futures contract if you are seeking profit from a quick expected move in the price of natural gas, or if you plan to day-trade the gas futures.
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Buy a gas futures contract with an expiration date months or years away if you are seeking long-term exposure to the price appreciation of natural gas.
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Tips & Warnings
While buying gas futures is not particularly complicated, consistently profiting from the trading of any investment vehicle is challenging. Gas futures are among the most volatile trading investments in the world and their price behavior can be unpredictable. A change in weather conditions, for example, can dramatically influence the price of a gas futures contract. Always invest with great caution, and do not place all your investment capital in one idea.
