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Wednesday, October 8, 2014

Commodity Trading as an Investment Opportunity

Trading in the stock exchange has long been considered a risky albeit financially appealing investment game. To buy stocks when they are lowly priced and sell them when their value rises is a quick way to make money for those who understand how the stock market rolls. Commodity trading is similar to trading stocks on the market, but instead of manufactured goods the trading takes place for primary goods. These may be considered the raw goods from agriculture like wheat, cocoa, sugar and coffee, or the commodities that are mined such as gold, silver, oil, etc. Crude oil, natural gas, rubber and even energy can be traded in the commodity market.
Commodity Trading

What is a Commodity Market?

Simply put, a commodity market is the place you can buy and sell commodities such as the ones listed earlier. There are two types of commodity markets: spot and derivatives. In the spot market commodities can be bought and sold immediately for delivery. The derivatives market deals with the secondary derivative products rather than the primary ones. In a derivatives commodity market you have different types of financial instruments, the most popular being called futures trading. In futures trading a contract is made up as an agreement to buy or sell a specific commodity at a rate agreed upon in the future. Usually futures’ trading is done by commercial or industrial users of the commodity. For instance a construction firm may trade for steel, or an energy firm may bid on natural gas.  Retail investors usually stick to spot markets for commodity trading.

How does one do commodity trading?

Commodity trading is very similar to trading on the stock market. As a retail trader you will have to register yourself with a National Spot Exchange. Your account will have to be funded with a minimum deposit for each commodity that you wish to trade in. As a speculator you will hope to turn a profit from the changes in the price given in the futures trading contract. You will not take actual physical delivery of the commodity yourself like the commercial or industrial investors. Usually you will close out the contract before it ends to someone else interested in the actual physical commodity. The idea is to buy a contract at a low price and then sell it at a higher one. However there is a huge scope for both returns and losses as a futures account is affected in a big way by even the smallest price movements.

Commodity Trading as an Investment

For those looking to diversify their portfolios beyond stocks, bonds and property as investments, commodity trading offers a valid option. After you set up an account on the commodities exchange you may also wish to get help from commodity brokers who can help you trade through the internet.  While the commodities market is a volatile one, with some careful studies a retail investor can make a pretty buck doing commodity trading. Just make sure that you set your minimum entry and exit limits per commodity so that you can control your losses as effectively as you can reinvest your profits.

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