How to Invest in Cocoa

How to Invest in Cocoa
••• Cocoa Pattern image by Hector Fernandez from

Cocoa is a commodity and as such it is traded in the commodity futures market. There are actually two ways to invest in cocoa, namely cocoa futures contracts and cocoa options. There are pros and cons to each method of investment, but overall it is relatively simple to invest in cocoa.

Open a futures trading account. There are various brokers that specialize in futures and some that even allow you to trade stocks and futures. Some things to compare when evaluating brokers include commission costs, trading software and customer support services.

Deposit margin. Initial margin is the amount of money you need in your account to trade a particular futures contract and maintenance margin is the amount you must have to continue holding a position. The New York Mercantile Exchange (NYMEX) currently requires initial and maintenance margins of $3,300 and $3,000 respectively to trade one cocoa futures contract.

While the exchange sets the absolute minimums, your broker may have higher minimum margin requirements for clients. Also, bear in mind that there may be lower account requirements for trading cocoa options. Investors who want to invest in cocoa without risking too much money up front may want to start by investing in cocoa options.

Buy cocoa futures or call options. Each futures contract represents 10 tons of cocoa and the minimum price fluctuation or tick size is $1/ton or $10. This means that you gain $10 for every tick in your favor and lose $10 for every tick against your position. Profits and losses are credited or debited to all trading accounts at the end of each trading day.

Options work differently than futures contracts. With options, you pay a certain amount of money (referred to as the premium) to buy an option. The premium is the most you can lose on the trade. However, if the market moves in your favor, your option gains in value. At this point you can exercise the option and enter the cocoa futures market or simply sell the option for a profit.