Getting Started in Commodities

Chapter 4

Commodity Trading in the Index Markets

All investors—whether they're trading in stocks, bonds, or commodities—constantly strive to beat the market. For stock investors, the market is typically represented by the Standard and Poor's 500 Index; for domestic bond investors, it's likely to be the Lehman Brothers Aggregate Bond Index. For a long time, commodity investors have had the Commodity Research Bureau (CRB) index as a benchmark against which their investment prowess could be measured.

Commodity Research Bureau (CRB) index

first calculated in 1957, the index is used to track the price changes in a basket of futures and commodities prices.

Traders engage in active management when they attempt to produce investment returns better than a target market benchmark. By researching individual stocks, bonds, or futures, active players hope their programs of buying and selling provide incremental returns above that of the market.

There are other investors, however, who believe that attempts to outdo the market are futile. These investors try not to beat the market return, but merely to replicate it. They do so by adopting a passive style of portfolio management. Passive management entails buying and holding all, or at least a large representative sample, of the securities or commodities in a target index.

passive management

an investing strategy that attempts to mirror, rather ...