A commodity is a basic group in commerce that are standardized and interchangeable with commodities of the same type. The exchangeability implies that equal units of the same commodity is uniformly priced across the world. However, that is excluding the additional costs and local taxes that will be levied on the commodities. Apart from actionable claims and money, a commodity can be anything that can be classified as movable goods, eligible to be bought and sold. Generally, traded in sufficient quantities, commodities support efficient, liquid trading markets. Through these markets, the traders, producers and consumers of commodities can transparently conduct business. The following are some basic information which will help a trader understand how to trade in commodity market.
A commodity trading market facilitates the trade of all kind of commodities and the market could be either a derivatives market or a spot market. If a market is a spot market, commodities here will be traded to be bought and sold for immediate delivery. If, however, the market is a derivatives market, commodities with numerous financial instruments based on them are traded.
Before an investor can begin to trade in commodities, there are certain factors that they need to keep in mind:
Selecting a Commodity Broker
The very first step of the process is to select a commodity broker. Online trading services are offered by nearly all brokers but, there are some that specialize in online trading. The investor is advised to compare between brokers that offer the best service with lower rates of commission.
Commodities Account Paperwork
The investor must be careful with the information they disclose as a commodities account opening form requires details regarding the investor’s financial history. In the forms there is a requirement to disclose personal financial information as there risks involved in commodity trading. Since there is always a chance that the investor may not gain as much as the amount invested, the broker will require information regarding the investor’s financial stability (such as net worth, stable source of income) before progressing. Based on the information provided regarding an investor’ finances, it is up to the broker to exercise discretion and caution in deciding the suitability of a potential customer.
Before You Start Trading Commodities Online
After the commodity broker has dealt with the paperwork and the formalities, and the trading approval has been received, it is then necessary to decide on the funds. It is up to the investor to decide on the amount they are willing to invest. An investor is advised to be cautious when deciding on the amount, keeping in mind that there is always a chance that might incur a loss. Therefore, while deciding on the amount, before they can start to trade, it is also essential for an investor research on the subject and have a well-calculated trade plan ready.
Commodity brokers often offer simulations that their clients can practice with before they enter into the actual process of trade. Utilizing these simulations, investors can gain a good idea of how the process works and it can also provide valuable insight for their trade plan. Familiarization with the field can possibly prevent the investor from making critical errors and aid in forming an efficient idea of the future process.
For an investor, it is advisable to be very careful when choosing their traders. It is also important that they not go overboard, keeping a steady track of the gains and losses that they may incur over the course of the trade.
How can one invest in commodities?
Investment in commodities can be conveniently done through a Futures Contract. A commodity Futures Contract is a contract that details the buying and selling of certain physical commodities or financial instruments and their delivery on an agreed price and a previously set date. The details in a commodity Futures Contract include the quantity of the commodities being traded, the location of the delivery, the date of the delivery, the quality and kind of the commodities, as well the set price of the commodities.
The price that has been settled is going to remain the same despite the changes that may have affected the market. As is pre-given, trading in commodities and commodity futures contracts can be risky but, if an investor has done their sufficient research, it is a great avenue to start expanding one’s investment portfolio. If an investor can create a well-researched plan of trade and adhere to it, they run a high possibility of gaining significantly by trading in commodities.
The current state of the commodities market
In case of commodity derivatives, foreign entities did not have complete access to the Indian market of commodity derivatives, even though they import and export various commodities to and from India. Recently, it was considered that the foreign entities are valuable stakeholders of the Indian market given their considerable exposure to the trade of commodities. Given their significant involvement, they are also exposed to the uncertainty regarding prices in the commodity markets. As a result, the regulator of capital markets SEBI(Securities and Exchange Board of India) concluded that these entities should be given an opportunity to hedge the risks they might suffer at the commodities market.
SEBI declared that foreign entities will be permitted to participate in the commodity derivatives segment of stock exchanges in order to hedge their exposure. Such foreign entities will hereafter be recognized as Eligible Foreign Entities (EFEs). Hedge limits to be set for the EFEs will be individually set on a case to case basis, where an applicant’s merit and exposure to the commodity will be considered. Other factors like the company’s hedging requirement will also play a key role in the determination. As of now, several analysts have concurred that SEBI’s decision will positively impact the market and increase liquidity.
For investors who are looking to expand and diversify their investment portfolios, commodities are a lucrative solution. It is a common conception that investing in commodities is a more risky alternative to safer investments like ETFs, shares, and more. However, there have even been instances where the pricing in bonds and equities have been more unsteady than in the case of commodities. Therefore, if the investor does their research and makes a well-informed and educated decision regarding the investment, commodities are a highly profitable investment and a good way to diversify one’s portfolio.