# How to Buy an Investment in Soybeans

by Francesca Lee

Investors use futures contracts to hedge risk, diversify their portfolio and trade physical commodities only available on certain exchanges. Agricultural commodities such as soybeans can work as profitable additions to an investor's strategy. You need a futures account to buy or sell these contracts, enough capital to keep margin calls at bay and a foolproof alert system: If you miss your expiration date to sell, you could have a delivery of 135 metric tons of beans on your hands.

## Estimate Costs

1. Calculate how much a single soybeans contract will cost. Use your broker's trading software to check the current price of the contract. For this example, we'll use historic price data for the calculations. According to the CME Group, one full contract of soybeans (ZS) equals 5,000 bushels. Calculate the total price of the contract using this formula: 5,000 bushels (contract) x 13.92 (price per bushel) = \$69,600. You need close to \$70,000 to purchase a single contract.

2. Verify the initial margin amount through the CME Group or your broker. Futures contracts require investors to have adequate funds to cover the initial trade -- the "margin" or good-faith cash -- in their account. To o hold the trade over several days, weeks or months, your account must have what's known as maintenance margin. For instance, using historic data, let's say the initial margin for soybeans equals \$3,713 and the maintenance costs are \$2,750. Therefore, you need \$3,713 for the initial position and \$2,750 to keep it every day.

3. Calculate the total investment amount by adding the margin costs. Use this formula: \$69,500 (one contract) + \$3,713 (initial margin amount) = \$73,213.

4. Calculate the profit potential. Futures prices move up and down in increments called "ticks." The "tick value" for soybeans equals \$12.50 per tick. So, for each tick movement in price, the value of your position decreases or increases by \$12.50. A four tick move equals a \$50 gain or loss.

5. Select the futures contract month for which you want to purchase and place your order with your broker. Futures contract months and the corresponding symbols are as follows: January (F), March (H), May (K), July (N), August (Q), September (U) & November (X). Have an exit strategy and a clear idea of how much the contract should gain in value before you decide to sell it at market. You can also roll it over and extend the contract. Check a futures almanac for the best months to trade soybeans. Professional traders use the "Commodity Trader's Almanac" -- updated yearly -- as a primary resource.

#### Tips

• Each time you purchase a futures contract, you're required to have the initial margin available in your account.
• Set an alert to remind you when the contract expires. Make sure you use adequate stop losses for the trade, in case the market prices move against you.

#### Warning

• If you withdraw funds from your futures contract and you have insufficient margin to cover your trade, your broker can initiate a "margin call" and liquidate your contract (sell it) to cover its costs.

### Items you will need

• Broker account to trade futures
• Capital