0 What is Commodity Trading: Types & Benefits of Investing.

 

A commodity is a group of assets or goods that are important in everyday life, such as food, energy, or metals. A commodity is alternate and exchangeable by nature.

What is commodity trading?

Commodity trading is trading in commodity spots and futures (derivatives). A commodity is a major raw material in commerce that organizations or individuals purchase or sell. They are frequently the building block for extra complicated goods and services. Commodities are commonly allocated into 4 categories:

1) Agricultural- It comprises livestock (e.g., cattle, pork bellies, and hogs), industrial crops (e.g., rubber, lumber, and wool), and food products (e.g., soybeans, corns, and cotton).

2) Metals – It comprises base metals (e.g., aluminum, iron, etc.) and valuable metals (e.g., gold, platinum, etc.)

3) Energy – It comprises petroleum products like gasoline and crude oil, heating oil, natural gas, coal, uranium, ethanol, and electricity.

4) Environmental – It comprises products like renewable energy certificates, carbon emissions.

• Why should one trade in commodities in 2021?

Investors who like to harvest the outcomes from the price trends, and love to modify their portfolio, usually invest in commodities. There are numerous explanations why people opt for commodity trading. Some of them are:

1. Diversification

Commodities enable investors to diversify a portfolio. Commodity returns frequently have low to no correlations with returns of other substantial categories like stocks and bonds. This implies that usually when stocks and bonds plunge, commodities surge. (Please note: Still, this should not be accepted as a comprehensive rule.)

2. Protection against inflation

Commodities are influenced contrarily by inflation as correlated to bonds or stocks. This is because, during inflation, the significance of currency starts to downgrade. This steers to a decline in the substantial value of economic assets like bonds and stocks. Still, commodities retain their rates and value, even during increased inflation.

 

3. Liquidity

Investment in commodity futures gives huge liquidity, in distinction to different assets like real estate. Thus, an investor can promptly liquidate his role in commodity trading.

 

4. Higher returns

Commodity markets are relatively erratic, as they can have vast swings in their rates. Well-planned investments in commodity trading can arise in higher returns than different assets.

 

5. Commodity trading on lower margin

The margin placed with the broker in commodity trading is almost 5-10% of the cumulative value. This is much lower than additional asset classes’ margins. This enables an investor to take bigger positions with less revenue, enhancing their potential for increased returns as well.

 

6. Hedge against event risks

Events like conflicts, natural disasters, and financial catastrophes can downgrade an investor’s assets. These events are recognized as event risks. While such events might influence bonds and stocks negatively, they result in the surge of specific commodities.

• Major commodity exchanges in India-

Some of the important commodity exchanges in India are:

1) Multi-commodity Exchange of India Ltd, Mumbai (MCX)

2) National Commodity and Derivatives Exchange of India, Mumbai (NCDEX)

3) Indian Commodity Exchange (ICEX)

4) ACE Derivatives and Commodity Exchange Ltd.

5) National Multi Commodity Exchange, Ahmedabad (NMCE)

Apart from these, there are provincial commodity exchanges for commodity trading in India, operating all over the country.

• Advantages and disadvantages of investing in futures in 2021.

Like everything has its pros and cons, investing in futures has its benefits and drawbacks as well.

1. Stable Margins

Margin requirements for most of the commodities are reliable and low, as distinguished to different asset classes. Therefore, an investor understands how much margin he wants to put in a contract.

2. Hedging against price variations

Forward contracts are usually utilized as a hedging tool in businesses that experience increased levels of price variations.

3. High liquidity

Future markets are usually relatively liquid, particularly in the case of indexes, cash, and other normally traded commodities. Therefore, an investor can enter or exit whenever he/she wishes.

4. Simple pricing

Future pricing is relatively manageable to comprehend by most investors. It is usually founded on the cost-of-carry model. In this, the rates of the future are inferred by adding the cost of carrying to the spot rate.

5. No time decay

Time decay is a spectacle wherein the value of the assets dwindles over time, which is relatively popular in options. Still, futures do not have to encounter time decay.

6. Protection against future risks

Plenty of people enter into forwarding agreements to defend themselves and organize risks in a promising way. They are also utilized to hamper risk against foreign currency exchange.

• Disadvantages of investing in futures:

1. No supervision over future events

One of the crucial drawbacks of investing in futures markets is that you don’t have any supervision over prospective events.

 

2. Expiration dates

Future contracts comprise an expiration date. A futures contract might evolve as less glamorous as the expiration date comes upon.

•  Commodity Trading Secrets

Commodity futures trading may furthermore offer lower commissions and trading expenses, although, with all the discount stock brokerages that prevail presently, that’s is not a huge problem as it was 20 years back.

Commodity trading holds a benefit over illiquid investments such as real estate since any money in your account that is not being utilized to margin market roles you’re holding is readily accessible to you at any moment.

Finally, in commodity trading, it is almost as simple to profit selling short as buying long. There are no regulations on short selling as there are in the stock markets. Retaining the potential to benefit just as effortlessly from plunging prices as from surging prices is a crucial benefit for an investor.

• Commodity Trading Secrets – Discover Your Market

Here is one of the little-known commodity trading secrets: Invariably prosperous commodity traders practically always specialize in trading either a single market, such as cotton, or a small market segment, such as expensive metals or grain futures.

No one has yet given a satisfactory explanation for this fact, but it stays a truth that very few traders seem competent in trading all commodity markets equally well. There was a relatively well-known trader back in the 1980s who had an almost accurate trading record in the cotton market. Duplicating his cotton trades back then would have been about the intimate thing to just publishing heaps of money for yourself. Year in and year out, he named market highs and lows and trend differences almost as if he’d transited into the future and already glimpsed them all unfold.

 

Still, this same uncannily bright cotton trader had one disastrous flaw: He also adored trading the silver market. Unfortunately for him, he was almost as outrageously horrible at trading silver as he was outrageously nice at trading cotton. His deficiency was mixed by the fact that while he commonly traded long-term trends in the cotton market, he day traded the silver market, which gave him fresh opportunities to lose his wealth on every trading day of the week.

How did this all function out for him? Well, in 1 year when he made over a million dollars trading cotton futures, he came out filing a net loss in trading for the year. That’s true – his horrifically awful silver trading had more than annihilated every bit of his enormous revenues from trading cotton.

Massive institutional traders such as banks have understood this essential truth about trading nicely. At the trading desks in a bank, you’ll seldomly, if ever, discover the similar person allocated to trading both the gold market and the soybean market. The mutual arrangement is to have commodity trading very technical, usually with 1 trader or one team appointed to trading just 1 segment of the futures markets, such as energy futures or expensive metals futures.

Where to invest in commodities?

• There are 6 crucial commodity trading exchanges in India as listed below.

1) Multi Commodity Exchange – MCX

2) National Commodity and Derivatives Exchange – NCDEX

3) National Multi Commodity Exchange – NMCE

4) Indian Commodity Exchange – ICEX

5) Ace Derivatives Exchange – ACE

6) The Universal Commodity Exchange – UCX

 

• What are mutual funds and index funds in commodity trading?

It is relatively absurd for direct investment of mutual funds in commodity trading. Relatively, there is an investment in stocks of the organizations involved in commodity-related businesses such as Energy, Food processing, or metals and mining.

Investing in stocks of such businesses involves increased risk, particularly company-related risks. The investment in a minor volume of commodity index mutual funds in future contracts gives direct exposure to commodity rates. Even though the management expense is barely high and there is no equitable play in the stocks, there are specific benefits of investing in mutual funds in commodity trading, comprising of diversification of the investments, liquidity, and reasonable money management.

• Commodity Trading Secrets – Prices Tend to Trend In 2021?

The supply and demand quotient for fundamental raw materials is usually much less subject to ongoing volatility than is the case with stocks. Necessarily, there are some relatively volatile trading days, such as those that occur at the end of central bull or bear trends when there are long-term market setbacks or following a crop failure report that appears suddenly. But commonly speaking, there tend to be maintained periods when increased demand or short supply controls a market, driving rates higher, or when oversupply or absence of demand drives prices lower.

• Commodity Trading Secrets – Take Benefit of the Behavior of the Market

Another of the commodity trading secrets is expending attention to a component that is extraordinary to commodities as defied to different investment vehicles and which tends to considerably steer prices – seasonality. Nearly all crucial commodity markets tend to pursue established seasonal price patterns. A simple illustration is heating oil and natural gas futures. Both of these commodities tend to, year in and year out, soar into the winter months when need is highest and decline into summer as demand plunges off.

 

There may be specific economic situations that disrupt this general pattern from moment to period, but over any 10 years, one can relatively anticipate such comprehensive season price trends to operate at least 7-8  years out of 10.

Trading seasonal patterns are not a safeguarded victory – nothing in trading ever is – but it gives traders an additional edge. Seasonal patterns can be utilized as corroborating indicators of a prevailing trend, or as cautioning contrary indicators that may make a trader wisely attentive for an approaching trend change.

Conclusion

Understanding commodity trading secrets offers investors crucial benefits, such as huge amounts of power and the alternative to driving sustained bull or bear trends. Still, commodity trading is not a charitable company that just hands out luggage full of money to anyone who wants some.

 Just as is the case with any additional investing arena, it takes practice and sheer discipline to become a highly-skilled and prosperous commodity trader. One of the crucial challenges is understanding how to take benefit of the commodity trading tactics without endangering yourself to extremely too high risks and potentially terrible losses. Because, honestly, that’s the awful story of many who attempt their hand at the commodity trading game – they lose.

Summary -

Commodity trading in India started way back in time, even before it did in many other countries. But, foreign invasions and ruling, natural calamities, and many government policies and their amendments were significant reasons for the diminishing of commodity trading. Today, even though there are various other forms of the stock market and share market traders, commodity trading has regained its importance.