Natural gas futures have a direct influence on natural gas prices. The benefit to this is that there is transparency in the price of natural gas. Anyone can turn on CNBC, pick up the Wall Street Journal or look for the price online. No longer are natural gas prices shrouded in secrecy.

So what can we do with this information? You can invest in natural gas in several ways. One way is to trade the natural gas futures on the New York Mercantile Exchange. This is the largest natural gas futures contract in the world. This contract is called the Henry Hub natural gas contract since it is based on delivery of gas to the Henry Hub gas processing plant located in Louisiana. This futures market was opened in 1990, and natural gas futures options were introduced in 1992 as a further way of hedging natural gas prices.

Natural gas contracts are traded 2 ways. First is the open outcry way. This is where your order is directed to the trading floor and executed in the natural gas pit. These are the people you have seen in movies like Trading Places and on TV jumping and screaming at each other to make a trade.

You can also choose to execute your trades electronically. Here you will select a price on your computer at which to trade. Since open outcry and the electronic trade off of each other, the prices will be the same.

You would need to open a futures or commodity account with a broker. You can find many of them online. You will need see how much money you will need to open an account, what their margin requirements are and how much they will charge per trade. Not all futures brokers charge the same commission. You will need to check commission prices and the level of service they will offer you. Do you prefer to do your own research or do you want to be guided by the broker?

If you do decide to trade off a screen, you will then have to invest in a fast computer and a high-speed cable connection. You don’t want to be left in the dust by faster traders. You will also have to choose which trading platform and charting software you want to use too.

Another way to trade natural gas futures is to invest in a natural gas ETF (exchange traded fund). One of the most popular natural gas ETFs is the United States Natural Gas Fund (ticker symbol UNG). This gas ETF purchases the front month futures contract on the NYMEX. When the front month is within 2 weeks of expiration, they will then “roll” the contract into the next month. This means they will sell their position in the front month and at the same time purchase the next month contract so you are always “long” the market.

What if you think the price of natural gas is going down? How can you profit from that? Once again you can trade a natural gas ETF that is based on the movement of the futures contract. The Horizons BetaPro Natural Gas Bear Plus ETF sells or gets “short”’ the front month natural gas futures. This ETF also “rolls” its contracts forward near expiration so you will always be short the natural gas market.

Now you know how natural gas prices are set and how you can profit from them.

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Why should you trade a natural gas ETF short fund? You will find it is easier to trade a fund designed to be short the market than trying to do it yourself. If you want to short natural gas futures, you would need to open a futures trading account. If you wanted to short natural gas companies, you would need to go to your stock brokerage firm, set up a margin account, and hopefully be able to borrow the shares you want to short. By selecting the right short gas ETF, you can be short the market with the click of a button.

Here are a few short natural gas ETFs to choose from:

Horizons BetaPro NYMEX Natural Gas Bear Plus ETF (HND-TSX) 2x

ProShares Short Oil & Gas (NYSE-DDG)

ProShares UltraShort Oil & Gas (NYSE- DUG) 2x

ETFS Short Energy ETF (SNRG-LSE)

The Horizons BetaPro Natural Gas Bear Plus ETF is perhaps the purest short natural gas play there is. This fund is based on the nearby or front month natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) This fund takes a short position in the front contract. Since each month the front contract will expire, this fund will need to switch the fund into the next contract month. Beginning with the 5^th business day of the month, the fund then begins to “roll” the contracts into the next contract month. This will take place over 8 days until the fund sells all its contracts in the expiring front month and buys contracts in the new front month. Another interesting aspect of this fund is that it is a leveraged fund. The Natural Gas Bear Plus ETF attempts to match twice (200%) of the daily price move. This fund is traded on the Toronto Stock Exchange and its ticker symbol is HND.

The ProShares family of fund offers 2 ETFs that invest in natural gas related companies. The ProShares Oil & Gas ETF (DDG) shorts stocks that make up the Dow Jones U.S. Oil & Gas Exploration & Production Index. The companies that are included in this fund are oil drilling equipment and service, pipelines, gas producers and service companies. Recent companies in this index (which is subject to change) are Exxon, Chevron, Apache and Halliburton. This energy ETF attempts to mimic the single day return (before fund expenses) of the under lying index.

If you want more bang for your buck, they offer the ProShares UltraShort Oil & Gas ETF (DUG). This fund is the same as the Short Oil & Gas ETF, but is leveraged to attempt to earn twice the return of the DDG ETF. Since you are trading a leveraged ETF your risk is twice as much, but the profits can be 2 times as large. You must access your risk before entering a leveraged fund.

Another short gas ETF to look at is the ETFS Short Energy ETF. This energy ETF shorts the natural gas market in addition to crude oil, unleaded gasoline and heating oil. The Short Energy ETF is based on the Dow Jones-UBS Energy Subindex. This fund invests in the previously mention crude oil gasoline and heating futures markets. This ETFs symbol is SNRG and is traded on the London Stock Exchange.

There you have a look at different ways you can be investing in short Natural Gas ETFs. If you feel prices are collapsing and going lower, then you should invest in Natural Gas ETF short funds.

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These proposals have been in the works for a few months. These new rules may only effect a few of the commodity based ETFs offered to investors.

The United States Natural Gas ETF is a fund that invests in natural gas futures. This is accomplished by primarily purchasing futures contracts on the New York Mercantile Exchange. Since this is a long only fund, it only purchases future contracts and doesn’t hedge the position.

This wasn’t a problem when the fund first started out, but as it has grown in popularity, its size is becoming to big for the futures market to handle. That is when the CFTC first stepped in.

The CFTC first examine the fund over the summer. Concerns were raised about UNG exceeding the position limits set forth by the CFTC. For a brief time during the summer, the United States Natural Gas ETF wasn’t allowed to create new shares for investors. This move then created a premium to the net asset value of the fund. The CFTC then allowed UNG to issue more shares and the premium went down.

To ease the pressure on the natural gas futures markets, UNG has moved into other areas to invest in natural gas. One place they have traded is on the IntercontinentalExchange (ICE). They trade a natural gas futures contract based on the NYMEX contract. UNG has also moved to trade swaps and over the counter products. By doing this, there is less risk to the fund to exceed the futures position limits set by the CFTC.

The United States Natural Gas ETF has sought ways to get around the position limits. The CFTC grants exemptions to position limits in certain ways. Position limits can be exceeded if used for hedging for example. This is a legal way to increase their position to meet the demand of investors wanting to buy into a natural gas ETF.

The CFTC has moved into this because of the run up in energy prices during the summer of 2008. The CFTC is trying to determine why prices spiked that summer. Was it due to speculation or was the worldwide demand for energy that great?

Even with this attention, today’s investor should look into natural gas ETFs if they want to invest in the energy market.

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WCAT joins the United States Natural Gas ETF (UNG) and the First Trust ISE-Revere Natural Gas Index Fund (FCG) as a play on natural gas prices. However WCAT will invest primarily in small cap firms. This will probably be a more volatile fund as compared to the larger cap gas ETFs on the market.

The fund comes with an expense ratio of .65% and currently has 56 companies in its portfolio. The top 3 holdings currently in the fund are Forest Oil, Encore Acquisition and St. Mary Land & Exploration. Each of these stocks makes up roughly 5% of the funds portfolio.

According to the prospectus, Wildcatters Exploration & Production Equity ETF will provide exposure to stocks listed on the United States and Canadian stock exchanges. These companies are engaged in the production and distribution of the oil and gas sectors. WCAT will try to replicate (before fees and expenses) the price and yield performance of the Thomson Reuters/Jefferies CRB Wildcatters Energy E&P Equity Index.

This fund will invest in companies involved with natural gas as opposed to UNG, which is a pure play on natural gas futures.

Small and mid-cap companies can be very volatile, but can also give you a big return on your investment. The natural gas market has been growing over the last few years. Exxon Mobil is making a move into natural gas with its purchase of XTO Energy in December of 2009.

Hopefully as natural gas grows, larger companies will be looking at small companies in the Wildcatters Exploration & Production Equity ETF as possible acquisitions. Do your research before investing.

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There are several ways to trade the natural gas market. One way to invest is by using a natural gas index fund. Another way is to trade the natural gas futures on the New York Mercantile Exchange or on the Intercontinental Exchange. Still another way is to purchase various natural gas stocks.

I’ve found that the best way to trade this market is to use a Natural Gas ETF. What is an ETF? ETF stands for Exchange Traded Funds. ETF are traded just like stock. You trade them through your stock broker. You can put them in an IRA or a SEP-IRA. You can buy them or even trade them short. They are fully marginable. Some Natural Gas ETFs even pay dividends.

Why Natural Gas ETF?

There are many different types of Natural Gas ETFs you can trade depending on your view of the market. There is an ETF that’s based on the movement of prices of NYMEX natural gas futures. There are ETFs that invest in natural gas drillers, exploration and suppliers. You see you have many choices on how to invest in Natural Gas.

ETFs are more transparent then mutual funds.

Have you ever tried to see exactly what stocks are in your mutual fund? Trying to get that information from your mutual fund advisor is tough. They often only publish it at the end of the quarter. And frequently they are involved in what is called “window dressing” They will buy some of the hot stocks that quarter at the end of the quarter to show you “hey we have this stock” Not so with Natural Gas ETFs. You know exactly what stocks are in your ETF. You know exactly how many contracts the Natural Gas futures ETF has EVERYDAY.

Natural Gas ETFs are less volatile than individual stocks.

If you invest in an individual natural gas stock, you are subject to possible bad news coming out about the company. Maybe one of their gas fields is having problems. Are you able to pick out the best natural gas stock to trade? With an ETF you will have a basket of stocks to help guard against any one stock from destroying your portfolio.

You can trade Natural Gas ETFs all day

When you trade a natural gas index mutual fund, what is the ONLY price you can get for it? The answer is the closing price of the day. There is no way to trade a mutual fund intraday. You’re at the mercy off buying or selling at the final price of the day. By trading a natural gas ETF, you can trade it intraday. You are free to try and “scalp” the market, react to news during the day. You can set price points to trade around during the day with an ETF. An index mutual fund does allow that.

Think the price of Natural Gas is going down? You can Short Natural Gas ETFs

That’s right. Do you think demand will be low this winter? Maybe this will be a warmer winter and you expect the price of natural gas to go down. You are able to short (sell) Natural Gas ETFs betting on the price of natural gas to go down. You’re not able to do that with mutual funds.

Add Natural Gas ETFs to balance your portfolio

With the current economic situation, with the possibility of inflation coming back, you can add a natural gas ETF to you portfolio as a hedge against inflation.

Natural Gas ETFs can be charted and analyzed using technical analysis.

Do you like to use price charts to trade the markets? Perhaps using moving average crossovers or Bollinger bands to discover a new trend. Since Natural Gas ETFs trade like a stock, you can use your favorite charting tools to trade the ETF.

Now you have learned the benefits of using the various Natural Gas ETFs that are available. Do a little more research and start trading now!

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Why would I purchase a Natural Gas ETF when I can buy a natural gas index mutual fund?

You certainly can buy a gas mutual fund from a fund family. But the annual management fees of doing so will be more expensive than the management fees of an ETF. Plus if you trade a natural gas index fund, you will only be able to buy and sell at the closing price at the end of the day. What if some news come out that you think will cause natural gas prices to rally? If you buy an index fund, most of the move will be made that day while you’re sitting on the side waiting to buy at the end of the day. Better to be able to react immediately and buy instead of watching other people make money.

Can Natural Gas ETF beat the market?

Natural Gas ETF provide an easy way for an investor to trade various segments of natural gas. There are gas ETFs that mirror the natural gas futures market and there are Natural Gas ETFs that attempt to follow the prices of various gas exploration companies for example. Those ETFs take a basket of stocks to give you diversified holdings in natural gas.

How and where do I buy them?

You can buy or sell them as you would any stock at your brokerage firm. Don’t have an account to trade stock? You can visit Sharebuilder and buy ETFs for $4 to open an account with as little as $0. Thats right, there is NO minimum amount to open an account. Visit the site for more  details.

ETF’s are they insured?

ETF’s are tightly regulated by the Securities and Exchange Commission (also known as the S.E.C.) The S.E.C. examines each ETF that is created and brought to market. The Depository Trust Clearing Corporation is in charge of the clearing of trades. Their job is to ensure that the stock certificates involved in each trade settle in the proper stock account each night.

As in any stock, there are underlying risks involved. That is up to you the trader if the risk profile matches yours. You are ultimately responsible for your trading decisions.

Why not just buy individual Natural Gas Stocks?

You can, but most investors prefer to be diversified when they invest. Depending on the size of your investment portfolio, you will not get the diversification that you need. You may be only to purchase a few stocks but with a Natural Gas ETF you can buy several for the same amount of investment. Plus if you traded say the United States Natural Gas Fund, you get to trade NYMEX natural gas futures without opening a futures account or exposing yourself to that much more risk. You could buy a few shares instead of having to put up the margin to trade the natural gas futures.

Are there ETFs for Propane?

Despite the demand and usage of propane gas, there are currently no propane gas ETFs at the present time.

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The US Energy Information Association states that the use of natural gas is projected to increase over 60 percent over the next 20 years. Natural gas should be in huge demand for providing power to the electric power sector.

One way to trade energy is to trade the Natural Gas ETF. What is a Natural Gas ETF? An ETF is similar in a way in which you trade stocks. With a Natural Gas ETF, you can buy it on margin and trade through your regular stock account. You can also trade them in your IRA and SEP-IRA accounts.

But isn’t Natural Gas traded as a commodity or futures, and isn’t that risky? True you can trade natural gas in the futures market, but that means opening up a separate trading account and constantly looking for price updates. Also when trading futures you can be exposed to wild price swings and be subject to margin calls.

The Natural Gas ETF is traded just like stock. If you already have a stock account, it as simple as deciding which etf to invest in. In fact you can open a stock account at sharebuilder.com and trade ETFs stocks for $4.

There are several types of Natural Gas ETFs. One way is a pure futures play like the United States Natural gas fund (UNG). This fund purchases near month natural gas futures on the New York Mercantile Exchange. When the near month contract is set to expire, the fund then “rolls” the holdings into the next month contract. This happens each month since there are natural gas future contracts for each month.

You can also invest in natural gas exploration like the SPDR S&P Oil & Gas Exploration & Production ETF and the Dow Jones US Oil and Gas Exploration & Production. These ETFs purchase baskets of stocks that are involved in the exploration and production of natural gas. For example the SPDR S&P Oil and Gas Exploration and Production fund has included stocks such as Exxon-Mobile, Chevron, Devon Energy and Conocophillips in the past and may in the future.  Check the latest holding statements in those ETF’s to see their current holdings

There is also an equipment and service natural gas ETF.  The SPDR S&P Oil & Gas Equipment & Services ETF tracks an index of oil and gas equipment and services companies. Some of the stocks in that ETF were Atwood Oceanic Inc.,BJ Services Co. and Dril Quip Inc.

Trading natural gas is very easy to do. As long as you have a stock trading account, you can begin to the Natural Gas ETF.

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