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In a message dated 97-09-20 15:40:19 EDT, you write:
<< I would like to
ask those of you who trade commodities what is it about commodities that
makes them preferable to stock trading for you. And conversely, those
of you who trade stocks exclusively, why do you avoid commodities? >>
Leo --
Good question! I trade both, but mainly stocks. Here are some thoughts
about the pluses and minuses:
Commodities & Futures:
+ A commodity, like wheat, is real and tangible, and has had a known trading
range.
+ A commodity, like wheat, cannot go Chapter 7.
+ With a commodity, you don't have to worry about what "management" may do
for you or do to you.
+ Don't have to worry about earnings surprises.
+ Commissions only charged on the round trip, not on both legs of a trade.
+ Commercial & large speculator positions are published.
+ Lots of information on supply and demand data; the trouble is that the
commercials have better data than you probably do.
+ Limited number of commodities, so you can stay focused on just several
charts instead of hundreds as with stocks.
+ Commodities generally trend more than stocks, so if you're a trend
follower, you may have better success with commodity trading (this has not
been true lately, as momentum and growth managers have dominated the stock
market in the last several years).
+ Easy to go short; no need to borrow shares, or short on an up-tick.
- Need to be constantly rolling contracts forward, meaning paying more in
commissions, or which results in discontinous data for weekly or monthly
charts, as well as confusing symbols, terminology and margin requirements.
- Commercials can trade on inside information; insider trading is illegal
with stock trading.
- Commodity trading is dominated by professional technical traders, who have
many more tools, people and contacts than most of us will ever have.
- Obtaining accurate data and knowing whether your data is accurate is a
problem. It's not helped by the Globex trading and other factors.
- Extra tax forms and needing to mark to the market at the end of the year.
- Volume and open interest are reported a day late, and the figures are for
all outstanding contracts, not just the specific contract you are interested
in. This always makes me suspect of the accuracy of the trading that goes
on, if it takes a day to work out all the errors and get the books straight.
- Weather news is a bigger factor than with stocks, and who can predict the
weather?
Stocks:
+ Stock symbols generally stay the same, unless the company changes their
name or moves to another exchange. Weekly or monthly data is continous and
logical.
+ A round lot of 100 shares is understood by all investors on all exchanges;
very simple. Don't have to worry about whether your order is covering 5,000
bushels or 5,000 pounds or ounces or whatever.
+ Fewer technical traders trading stocks, which makes for a more inefficient
market for technical traders, which I think is good for us.
+ Because most stock traders are fundamentalists, sentiment measures seem to
work better than on commodities.
+ Small trader may have an advantage over the institutional trader due to
liquidity problems.
- Stock shares are intangible assets, unlike, say, corn. That intangible
asset could totally disappear.
- Brokerage firms and analysts are generally pushing a stock; there is a huge
bias to the long side, much more so than with commodities, even though most
commodity traders are usually long.
- There are always more stocks coming onto the market, more than anyone can
ever keep track of.
- Stocks and mutual funds pay dividends, so you have to deal with ex-dividend
dates and price adjustments, or with mutual funds, dividend and capital gain
distributions.
- Companies go into quiet periods, like prior to earnings releases, which
makes for a lack of information flow at times.
- Sometimes difficult to short shares, as you need to borrow shares, which
may not be available for borrowing, and you need to usually short on an
up-tick.
Well, those are just some thoughts off-the-cuff. I'm sure I'll think of a
dozen more things after I send this e-mail, but I just don't have the time to
type any more. I hope I don't start a big controversy on this list server
with some of my comments, as I really am not intent on offending anyone. I
see pluses and minuses for trading both commodities and stocks. Some of the
books cover this argument in more detail. In some ways, technical analysis
works better with commodity trading, if for no other reason than that there
are so many commodity traders following the technical side. So, if everyone
knows about Fibonacci retracements, and a commodity pulls back to the .38
retracement level, then it almost becomes self-fulfilling that you'll get a
bounce there. On the other hand, the professionals know all this stuff, so
they try to thwart you by trading against you, so technical indicators and
techniques that used to work, often don't seem to work any more (I'm sure
this statement will stir up some controversy!).
Best,
Rex
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