Know How do you invest in the commodity trading market?


Naturally occurring resources such as iron ore, agricultural products, fossil fuels, as well as precious metals are known as commodity trading. Just like stocks or bonds, commodities can also be sold, bought, or traded. However, while stocks and bonds are just financial contracts, commodities are actual, physical items. Visit mex ae

Commodity prices keep shifting on the basis of how supply and demand forces are in play in the economy. If there’s a drought scenario in India, grain pieces will increase in the Indian economy while if there is an increased production. Of oil in the Middle East, oil rates would fall all over the world.

The aim of investors in the commodity market is to earn profits from the way supply and demand trends move. They simultaneously manage risks by diversifying their investment portfolio and adding a variety of assets to it. The key advantage of trading in commodities is the way you can keep your investments safe when there’s inflation. Differentiated exposure from the stock market is yet another plus point.

Types of commodities trading

Trades may include commodities in their portfolios in multiple ways but remember. That all of them come with their own pros and cons:

Commodity Futures

Commodity trading generally takes place with the help of a futures contract. In a futures contract, two parties enter an agreement about the future rate of the commodity.

Investors must have a specialty broker account so that they can invest in. Futures trading which allows future and options trades. Your brokerage firm would charge you a commodity future trading commission for opening or closing a position.

Physical Commodity

In futures contracts, investors don’t purchase or sell the commodity directly. Rather, they just speculate on the change in prices. But in the case of precious metals such as gold, silver, and platinum. Investors are able to take ownership of the underlying asset in the form of jewelry, gold coins, or bars.

Why Commodity Trading

Though with such trades you will be able to actually see your investment’s weight, metals like gold. Also come with higher transaction costs as compared to other investment options. It is only practical to invest in physical commodities if the commodity in question holds a lot of value. Despite this, an investor is liable to pay high markups on top of the spot price offered in the retail market.

Commodities Stocks

You could choose to trade commodities by also purchasing the stocks of a company. That invests or deals in a certain commodity. For instance, should you choose to invest in oil, . You have the option to purchase stocks from an oil refining company. The value of this company’s stock would be close to the rate of the actual commodity. Theoretically, if there’s an increase in oil rates, the stocks will also increase in value. It is much safer to invest in related stocks rather than buying the actual commodity since you’re not putting all your money into a single commodity. If the company is renowned, it may still run into profits despite the fact that the commodity rates are presently going down.

But do take into account the fact that this would work both ways. The price of oil could be rising but if there are internal issues in the company such as some updates in the internal management which has an impact on its overall market share, it could impact the prices.

How to start trading in commodities?

Open a Demat account with a reputed broker
Similar to how you require a Demat account to be able to trade stocks, it is also important for trading commodities. Though there are a number of brokerage houses through which you can open an account, make sure you’re going for a well-known firm which allows you access to leading recommendations with respect to the trade. Do bear in mind that you will require adequate input and guidance to navigate your way through the commodity market.

Another factor that is important when you pick your brokerage is to see if they offer competitive rates. If you select a broker with a high brokerage fee, you will not be able to pocket your gains. Take a look at the different services your broker offers. It is best if you choose a full-service broker who has an expert team to help you with detailed research and timely recommendations.

Deposit an initial amount
Once you open a Demat account you need to add funds to it. The initial deposit is typically 5% to 10% of the contract value that may vary on the basis of the commodity you trade.

These details will be accessible on your brokerage’s website. You must have a sufficient margin to make up for the losses and you even need to be armed with a commodity trading plan so you can understand how the market works and how much risk appetite you should have. Each trader would have different risk preferences and cash flow. You choose on the basis of how your finances are.

Make a trading plan
Once you’re through with all the abovementioned trading formalities, it’s time to create a commodity trading plan. The main reason why you should come up with a trading plan is to be able to understand how the market works. It would also help you come to terms with your financial capacity, risk appetite, and style of trading. It is even possible that a trader’s commodity trading strategy may not work for another. This is when a brokerage firm can be helpful as they provide you with the knowledge and information required.

Commodity Trading vs Stock Market

Leverage is much more prevalent in the commodity market as compared to the stock market. When you place your trades with leverage, you essentially put a small percentage of your own money at stake and borrow the rest. Investors must maintain a certain minimum balance in a futures contract. This balance would be determined on the basis of the expected trade value. If the market doesn’t move in the investor’s favour and a loss is likely, investors would have to deal with a margin call. This is when they need to add more capital to their account to return to the trade’s minimum value.

Commodity trading is a good short-term investment, particularly when futures contracts are involved as they have a date of expiry. On the other hand, investors could go long in the stock market and hold on to their assets for months and even years.

Trading Hours
The commodity market operates round the clock while the stock market has limited trading hours. That said, the stock market is safer than the commodity market but the latter could bring quicker and better results if traded wisely.