Commodity trading Tips

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Presentation Description

The financial market, which deals with raw materials is known as the commodity market and trading is referred to a commodity trading. Unlike the capital market, investors’ trade in different kinds of commodities categorized as soft and hard commodities.


Presentation Transcript

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A Must to Read Guide before Starting with Commodity Trading Tips The financial market which deals with raw materials is known as the commodity market and trading is referred to a commodity trading. Unlike the capital market investors’ trade in different kinds of commodities categorized as soft and hard commodities. Commodities are traded on different exchanges like New York Mercantile Exchange NYMEX the Chicago Board of Options Exchange CBOE the Chicago Board of Trade CBOT to name a few. Soft Commodities – Soft commodities are commodities grown on agricultural farms like soyabean sugar wheat and corn. These commodities are not extracted from the earth’s surfaces or other substances. They are highly prone to weather conditions therefore have a limited shelf life and prices are quite volatile in nature. Any sudden change in weather conditions may increase or decrease their prices drastically. Hard Commodities - Any commodity extracted from natural resources or mined from the earth is a hard commodity. Some of the best examples of hard commodities are crude oil and gold. If any commodity produced by refining other commodities it is also categorized under a hard commodity. For instance gasoline is a hard commodity as obtained from refined crude oil. Hard commodities are non-perishable in nature therefore easier to store. Moreover weather plays no role in their production and supply. The prices of hard commodities in commodity trading largely influenced by global macro-economic fundamentals like industrial production GDP growth interest rates etc. Basic Terminologies of Commodity Trading

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There are innumerable terms associated with the commodity trading market. Amongst them some of the common terms are: 1. Basis describes the difference between the current price of the commodity in the underlying spot market and the recent future contract. 2. Cash commodity is a physical commodity which is actually sold or bought. 3. Contract Grades are officially approved by an exchange as a deliverable in settlement of a future contract. 4. Stop-Loss helps in limiting the losses by assigning a stop-loss order to a certain position. This helps in managing risk and saving money of traders. 5. Spread is the price difference between two related commodities or markets or between a contract of varied maturities of the same commodity. 6. Volume is the total transaction that takes place in one trading day. 7. Contango is a scenario where the price of the contract is higher than the spot price. Benefits of Commodity Trading • Commodity trading in the form of future contracts gives a better opportunity to get higher returns. • The commodities traded on a global scale. Moreover the trading market is highly correlated with international markets. This actually leaves no or very less scope for manipulation. • Unlike debt and equity market it is a good investment diversification as returns generated in commodity trading not related to price fluctuation. It is not wrong to say that commodity trading is one such investment area where any person with sound knowledge of the commodity market and limited capital can earn good profits in a short time span also. It is because this market is purely driven by forces of demand and supply and luck has no role to play here. The possibility of achieving success is bright as commodities are essential resources for individuals and even regarded as building blocks to many industries like manufacturing etc. The commodity trading always remains in demand despite the fact it is a highly risky and volatile investment. If a person enters into the market with the hope of earning quick money he may end up losing more money than what earned. So if you are new to commodity trading then it is prudent to gather maximum knowledge about the fundaments of the market mechanics of investing factors pushing demand and supply etc. Some of the bases of trading are:

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• Remain sure about the total amount of investment. It is a risky business as there can be rags to riches story and becoming empty-handed from a millionaire. Thus enter into the market after deciding your investment amount limit. • Contact a reputed and trustworthy brokerage company and open a brokerage account. You need to park some money in the account for trading in certain commodities. • Depending upon your knowledge risk appetite and interest decide upon the commodities in which you need to trade. Agricultural energy crude oil base and precious metals are some of the options to choose from. • Even if you are choosing one commodity diversify your portfolio. For instance if you are picking agricultural diversify your portfolio by putting money in cotton wheat sugar etc. Besides these there are many other commodity trading tips that broking companies shared with their respective clients. So keep these commodity trading basics and tips in mind and look for a reputed broking house before starting trading in one of the most volatile commodity markets.

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