Commodity trading is the trading in commodity derivatives, where commodity refers to any bulk goods traded in the exchange. Mainly Bullion, Energy, Metals and Agricultural Commodities are trading in the commodity market. Derivative is a kind of financial security whose price is depend upon or derived from one or more underlying assets. The derivative assets may be in the form of stocks and bonds of corporate, commodities and currencies of various countries. Commodity trading basically refers to trading where investors buy or sell commodities, through future transactions or contracts.
A future is a standardized forward contract that requires delivery of a commodity at a specified price on a specified or predetermined future date. In this case the buyer is obligated to fulfill the terms of the contract. The buyer and seller have the option to square up their position before expiry of the contract subject to other conditions governing each contract. Although the commodity trading pattern is quite similar to equity share trading, it involves smaller margins and is lot easier to understand. A commodity trader can start with commodities like gold and grains, which attract very low margins. As well, the time limits for commodity trding stretch from morning 10 O’clock to mid-night. Hence it is possible to trade after completing day-to-day work.
Requirements – physically & mentally
Find a broker/sub-broker to open account to trade with commodity. The broker if satisfied with the economic standing of the person, they may ask pan card, demat account, bank account and margin money for opening account with him. After completing these formalities, the person allowed for commodity trading. Margin is the upfront money payable to broker before taking a position in the market. Like equity trading activity, the commodity trading requires the easy accessibility of information and liquidity facility. The trader can easily reduce risk by effective diversification. The low risk trading strategies include both delivery spreads and spot-futures arbitrage. The trader can take advantage of the low margins and take directional calls on the markets. The market is diverse in nature, and it is suitable for the day trader/speculator, long-term investor, hedger and arbitrageur.
Risk and Return
Higher the return there is risk also high; lower the return the risk is also low. Based on the risk-return appetite, the trader can enjoy benefit or return. Commodity trading is basically futures trading giving rise to leveraged positions. For this sake, mostly the wealthy and knowledgeable traders campaigning towards commodity trading place. Risk is inherent in any investment, by proper entry and exit strategy can safeguard from loss. The uncertainty and risk are part of all derivative markets and risk factors in commodity futures trading are similar to futures trading equity markets. The key difference is that the information availability on supply and demand fluctuations in commodity markets may not be as tough as the equity market. The return from the commodity market is also handsome, if the trading strategy of the trader worked out properly. The understanding about the technical and fundamental factors of global as well as domestic economy helps to earn superior returns from the commodity trading. Inflation is the big problem in the present economy; commodity is the good tool of investment strategy to beat inflation risk. Commodities are the hedge against inflation because unlike equity, commodity prices move in tandem with inflation. Besides, buying commodities make your investment truly global and there are no issues with company management or cash flow involved, all of which make commodity trading a pure demand and supply match.
Clearing and Settlement
Delivery based trading is now becoming popular. Each contract has a lot size and delivery size; it varied from asset to asset. Market participant are required to negotiate one the quantity and price of the contract, as all other parameters are predetermined by the exchange. Delivery is in dematerialized form and can be rematerialized at time at the request of the trader with the depository organization.
The markets are very lively and dynamic. A systematized and cautious moving will help to being a successful trader. Patience, discipline and knowledge are all important qualities to develop successful and fruitful commodity trading.