Trading in The Commodities Market - What? Why? How?

  • Posted By : reliancesmartmoney.com
  • Monday Aug 06, 2018

Key Takeaways

  • Gold, oil, natural gas, iron ore, crude oil, salt, sugar, tea, coffee beans, copper, rice, wheat, silver, and platinum are all commodities
  • Easier to trade, as the causes of price movements in commodities are transparent
  • Commodities are an essential hedge during inflationary periods

What?

Commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities include gold, oil, natural gas, iron ore, crude oil, salt, sugar, tea, coffee beans, copper, rice, wheat, silver, and platinum.

Commodities are basic because they have simply been grown or extracted from their natural state and brought up to a minimum grade for sale in a marketplace - there is no extra value added to them by the producer. Although the quality may differ slightly between producers, commodities by definition are very similar no matter who produces them. All commodities of the same grade are priced equally, and are interchangeable.

Why?

Unlike trading in shares, the causes of price movements in commodities are transparent, and there is no insider information that can benefit one group, but not others. As a retail trader, you have access to the same information as anyone else.

Also, commodities form trends on both a short and long-term basis. And with the right strategy, and close watch on the relevant news tickers, you can identify movements about to take place, take advantage of the right ones, and make big profits in the process.

How?

The first step towards commodity trade is the selection of broker. The discount or online brokers will offer you an online trade platform for relatively lower brokerage. However, you will not have an advisor to help you trade or provide research reports.

Once you decide on your broker, you must open a commodity demat account, for which you will have to provide PAN, bank account details, and address proof as a part of the KYC norms. Make a careful study to choose the commodity you wish to trade.

To trade on any commodity contract, you need to pay upfront the initial margin of 5-10 per cent (minimum) of the contract value. The contract value is the lot size multiplied by the market price. A lot size is the quantity of a commodity specified in the contract as tradable units, and differs for each commodity.

Commodities are an important component of a well-diversified portfolio and an essential hedge during inflationary periods. Furthermore, the transparency and ease of information discovery in commodities trading make them an easier and attractive instrument to trade in. The entry into the market thought calls for some knowledge of how the market works and study of how its systems work. As with all trading, diligence and discipline pay off.

Do your KYC online, open a demat account and start trading online with RelianceSmartMoney.com

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