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How to Trade Coal and the Risks Involved


How to Trade Coal Futures: Brokers and Costs

To buy or sell coal futures, you need to open a trading account with a reputable broker who handles futures trades. TD Ameritrade, CME Globex and Etrade are some well known online platforms for trading futures.

Most brokerage will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.

Risk

Coal Futures Trading comes with its own risks. The coal market has witnessed great price volatility since 2001, due to regulations, emergence of more efficient fuel sources, and depleting coal reserves. In 2001, coal prices jumped 200% whereas in 2008, coal prices soared 300%. These sudden spikes in coal prices can go against traders’ positions and cause heavy losses. Due to the high leverage of these futures, the loss on a trade may exceed the amount of the initial margin and even the entire account balance.

Furthermore, the high volatility of the coal attracts many speculators seeking high profits. This increasingly endangers the equity investments of hedgers.

Lastly, most coal futures are limited in their liquidity and it may not always be possible to offset a coal contract in the market. So while coal futures represent significant opportunities, traders will do well to keep the accompanying risks in mind— in order to truly profit from their contracts.

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