15/06/2024

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Electricity Futures Trading – 8 “Whys” And “Hows” Of Electricity Futures Trading!

3 min read
Electricity Futures Trading – 8 “Whys” And “Hows” Of Electricity Futures Trading!

There are some commodities that are essential for one and all, such as crude oil, gasoline, heating oil, propane, electricity and natural gas. These are sources of energy that the world cannot do without. Sensing this, the New York Mercantile Exchange (NYMEX) came up with the idea of transactions related to energy futures, base metals, propane, electricity, precious metals, heating oil, gasoline, natural gas and crude oil. But what it is most renowned for is, electricity futures trading.

To go into a more detailed commentary regarding NYMEX and electricity futures trading–

(1) The first question anyone would ask is, why is electricity being taken as an option for futures trading?

Electricity futures trading is prevalent because electriciy is a popular commodity among traders and investors. The prices never remain constant, they keep changing; generally, they are on the higher side. The last advantage is that electricity is something that is fungible (it can be exchanged or substituted).

(2) It is accepted by the trading community as a liquidity alternative to counter other stocks and bonds investments. So, a large number of people make a beeline to NYMEX. This exchange has the reputation of being a premier platform for transactions concerning precious metals and energy. It is after all, the largest global physical commodity futures exchange!

(3) NYMEX has an affiliate called PJM Interconnection LLC. Statistics reveal this to be the predominant global market for electricity, as more than 44 million clients have been involved with this company till date. Member firms of PJM have a capacity of 137,000 megawatts, or hold 1,000 generating units.

(3) Now, how does one exactly go about this business of electricity futures trading?

Transactions have to be conducted via a broker. And not just any broker, but one who has been recognized and certified by NYMEX as a series 3–commodity futures broker. The “right broker” has to be hunted out, and an account opened with him/her.

(4) Who can be classified as the “right broker”?

This person who represents the investor should be familiar with electricity futures trading, as well as have plenty of experience concerning transactions. It would be preferable to get a person whose focus is only on the electricity market. This ensures that the broker is an expert in this arena, plus time is saved by not diversifying into other areas. There is no conflict of interests between the broker and investor.

(5) Brokers can take up individual commitments, work with smaller units, or work with big companies and institutions.

(6) After a particular broker has been selected by the investor, it would be advisable for both to get together ahd have a discussion regarding–what is his/her current financial status, the amount the investor is willing to put in/risk, the objective behind the investment, how much does the investor know about options and methods concerning futures trading, and so on.

(7) A first-timer would be well advised to go through investment options carefully before parting with his/her money. Also, an investor should avoid comparisons with others, since each commodity trading account is customized according to the individual’s requirements. No two accounts are alike.

(8) There are peak hours for electricity futures trading, when business is brisk. They are from 7 a.m. to 11 p.m. Midnight to 7 a.m. are considered as off-peak hours; trading is allowed even during this time. However, http://www.nymex.com is there to answer further questions if required.

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