Commodity markets are a place for investors to trade commodities like precious metals, crude oil, natural gas, energy, and spices. Currently, the Forward Markets Commission allows futures trading for approximately 120 commodities in India. Trading in commodities is great for investors seeking to diversify their portfolio, as its investments often help with inflation.
What is Commodity Trading
After investing in equities, real estate, and precious metals like gold and silver, people started investing in commodities too. This has become a new platform for retail investors and traders to invest. However, commodity trading also has risks and challenges. But it also gives the trader a good platform to earn profits, where the trader can buy and sell commodities online. Like other segments of trading, trading in commodities also requires hard work, knowledge, experience, and dedication. The trader must have adequate knowledge about the commodity, the market, and the global economy that causes commodity price fluctuations. Traders need to have enough knowledge about fundamental analysis and/or technical analysis to be able to make the right moves in the commodity mar
How does the commodity market work
Suppose you have bought a gold futures contract on MCX at Rs 72,000 for every 100 grams. The margin of gold on MCX is 3.5 percent. So you will pay Rs 2,520 for your gold. Suppose the next day the cost of gold increases to Rs 73,000 per 100 grams. Rs 1,000 will be deposited into the bank account you have linked to the commodity market. Let's say after a day, it falls to Rs 72,500. Similarly, Rs 500 will be debited from your bank account.
Trading in the Commodity Market
The basic premise of commodity trading is Demand and Supply, such as when the Supply decreases, the Demand increases, and hence the Prices increase, and when the Supply increases, If it happens, the prices decrease along with the demand. By taking advantage of these fluctuations, the trader earns a profit or avoids a loss.
There are four categories of commodities broadly traded: Metals, Energy, Livestock, and Agriculture. Prices are also affected by changes in demand and supply influenced by weather, government policies, social factors, and global factors. Each commodity is traded under a specific lot size and contract price and price fluctuations lead to profits or losses. Here is a brief description of each category of commodity trading.
Advantages of commodity trading
Provides many benefits compared to other trading segments in Commodity Trading. Mostly, trading investment provides benefits to investors at the time of economic uncertainties.
a. The diversification of the portfolio
Helps to diversify the commodity trading, their portfolio. By investing in stock, bonds, and other segments with trader commodities, any one segment may be able to reduce their losses from a sudden decline. In addition, commodity, compared to stock, gives different reactions to economic and geographical factors. Therefore, investing in commodities can reduce returns and instability.
b.Hezing
When the economy falls down, inflation increases, and commodity prices increase. At this time, the prices of stock and bonds come down, but investing in commodities helps to avail and save the commodity from high precious.
c. The necessary margin
The necessary margin amount required for low-margin commodity trading is approximately 5-10% of the contract value, which is significantly lower than the other asset class. Therefore, the trader can trade more with less money.
d. Commodity trading
Commodity trading is quite risky but if the risk is well managed and the investment is done properly after appropriate research and analysis, then it can be a very profitable deal. Due to the rapid demand for commodities, commodity traders can increase and earn good money.
e. Investment in Biquidity
Commodity is highly liquid compared to investment in other asset classes such as real estate and purchase and sales are very easy and fast. Therefore the position can be easily square and can be cached when necessary.
What's different about commodity trading
There is a fundamental difference between commodity trading and stock market trading. In the stock market, you can buy shares once and sell them even after many years, but in the commodity market, trading takes place only in two to three close months. Therefore, it is important to follow a certain period while buying or selling deals. This is like equity futures trading.
What is the future contract
It is a buy-sell deal between two parties that is exchanged for a future date at today's price. The commodity is traded with national-level online monitoring and surveillance mechanisms. Commodity future contracts in MCX and NCDX are purchased based on expiry cycles for one month, two months, and three months.
Like all other forms of commodity
Trading risk investment and trade, commodity trading is also subject to many risks. When the investor enters the market without preparation or too many expectations, the risk increases. Investors should be careful and trade should be traded according to the power of taking risks. The following are some risks:
a. High leverage
The necessary margin amount for commodity trading is quite low, thus receiving high profit. However, if it does not work well then high profit can also work as a trap. The trader has a high probability of losing that money and thus may be subject to heavy debt.
b.High volatility
Commodities are quite risky in terms of absolute volatility. The volatility in commodities is about twice that of stocks and about four times that of bonds. Therefore, trading in the commodity market can be very risky for the inexperienced trader.
c.Lack of knowledge and understanding
The basis of any form of trading is experience and knowledge. Many new traders do not educate themselves and jump into the sea of trading on their own. Traders should read good commodity trading books, talk and share experiences with other experienced traders, and create their own trading plans and strategies before starting to practice trading. Thus, commodity trading is an interesting and rewarding process that helps investors in hedging, speculation, and diversification of their portfolios. Also, the market is quite volatile and risky, so the trader should exercise caution before entering the market and remain focused, dedicated, and diligent to earn good profits and minimize losses.
