What is a Commodity Market? Is Commodity Trading a Good Investment?

by Mike on March 16, 2015

What is a Commodity Market? Is Commodity Trading a Good Investment?

A commodity market enables you to trade in various commodities. Commodity can be a marketable item which satisfies human wants or needs. Put it simply, commodity is a raw material that can be bought and sold, such as gold, meat, copper or coffee. It includes all the raw or primary products including food, energy, metal, and agricultural products.

Commodity market can be a spot or a derivatives market. It can include direct physical trading and derivatives trading in the form of spot prices, forwards, futures and options. In spot market, commodities are bought and sold for immediate delivery. On the other hand, financial instruments based on commodities are traded in the derivatives market. These financial instruments are traded in exchanges.

The commodities market can be identified under three separate categories of participants – they include hedgers, speculators, and arbitrageurs.

Why Commodity Trading?

One can indulge in Commodity trading for several reasons, two of which are most important

For Risk Management (Hedging)

Hedging involves countervailing the price risk underlying in a cash market position by opting for an opposite position in the futures market. Buying futures contracts as a safeguard against the possible rise in the commodity prices is known as long hedge. Whereas, selling futures contracts to remain safe against possible decline in prices is known as a short hedge.

For Investment & Speculation

Speculation is thoroughly practiced in Commodity Market. It is done in order to engage in risky financial transactions so as to make profit in short or medium term fluctuations in the market value of a tradable good. Trading here does not require you to possess physical stocks. In fact, not even 1% of the total traded volume includes the transfer of physical commodities.

Trading in commodity futures involves three basic steps.

1.      Choose Your Broker – You can get a list of established brokers from the respective exchanges and decide upon the broker you want to choose from. There are several reputed firms that offer commodity trading services like IndiaInfoline Limited, Motilal Oswal Financial Services limited, Angel Broking Services to name a few along with many reputed nationalized and private banks.

2.      Depositing the Margin – Margin is the amount paid upfront as a collateral to exchanges via brokers, acting as a security deposit. This margin typically ranges from 5-10% of the total value of the contract.

3.      Access to Information and a Trading Plan. You can also participate in commodity trading online. Leading brokerage houses like IndiaInfoline offer online brokerage services for commodity trading through their proprietary trading terminals for desktop and mobile applications.

For starters, you need a bank account. Also, you will require another Commodity Demat account from the NSDL (National Securities Depository Ltd) to conduct trading on the NCDEX (National Commodity and Derivatives Exchange).

What Commodities Can You Trade In?

The categories of trading commodities include:

·         Metals (gold, silver, platinum and copper)

·         Energy (crude oil, natural gas and gasoline)

·         Agricultural (wheat, rice, cocoa, coffee, cotton and sugar)

·         Livestock (lean hogs, live cattle and feeder cattle)

What You Must Know?

In comparison to stocks, commodity trading is cheaper. That’s because the margins are comparatively lower than stock futures. Brokerage, too, is low for commodity futures ranging from 0.05% to 0.12%. Because of this, commodity futures are a speculator’s paradise. Remember this commodity trading tip – just like any investment, commodities can be a risky business too. They can quickly turn into risky investment propositions since they can be impacted by eventualities that are difficult to predict.

 

Several websites today offer real time financial news and updates. One of them is IndiaInfoline which is one of the leading online financial news portal in India. To avail latest news and prices for commodities markets visit the website now and leverage the experience.

 

 ***Photo thanks to Lars Plougmann***

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