Before we understand about commodity trading, let us know what commodity means. A commodity is anything within the market, on which you’ll be able to place a value. It may be a market item reminiscent of food grains, metals, oil, which help in satisfying the wants of the availability and demand. The price of the commodity is topic to fluctuate based on demand and supply. Now, back to what’s commodity trading?
When commodities equivalent to energy (crude oil, natural gas, gasoline), metals (gold, silver, platinum) and agricultural produce (corn, wheat, rice, cocoa, coffee, cotton and sugar) are traded for a financial acquire, then it is called as commodity trading. These will be traded as spot, or as derivatives. Note: You may also trade live stocks, akin to cattle as commodity.
In a spot market, you purchase and sell the commodities for immediate delivery. Nonetheless, within the derivatives market, commodities are traded on numerous monetary ideas, resembling futures. These futures are traded in exchanges. So what’s an change?
Exchange is a governing body, which controls all the commodity trading activities. They guarantee smooth trading activity between a buyer and seller. They help in creating an agreement between purchaser and seller in terms of futures contracts. Examples of Exchanges are: MCX, NCDEX, and ECB. Wondering, what a futures contract is?
A futures contract is an agreement between a purchaser and seller of the commodity for a future date at at this time’s price. Futures contract is totally different from forward contract, unlike forward contracts; futures are standardized and traded in line with the phrases laid by the Exchange. It means, the events involved in the contracts do not decide the terms of futures contracts; however they just settle for the terms regularized by the Exchange. So, why spend money on commodity trading? You make investments because:
1. Commodity trading of futures can convey enormous profit, briefly span of time. One of the important reasons for this is low deposit margin. You find yourself paying wherever between 5, 10 and 20% of the total value of the contract, which is much lower when compared to different forms of trading.
2. Regardless of efficiency of the commodity on which you have invested, it is simpler to purchase and sell them because of the nice regulatory system fashioned by the exchange.
3. Hedging creates a platform for the producers to hedge their positions based on their exposure to the commodity.
4. There isn’t any firm risk involved, when it involves commodity trading as opposed to stock market trading. Because, commodity trading is all about demand and supply. When there’s a raise in demand for a particular commodity, it gets a higher price, likewise, the opposite way too. (could be primarily based on season for some commodities, for instance agricultural produce)
5. With the evolution of online trading, there’s a drastic progress seen in the commodity trading, when compared to the equity market.
The data involved in commodity trading is complex. In right now’s commodity market, it is all about managing the data that is accurate, replace, and contains data that enables the customer or seller in performing trading. There are lots of companies in the market that provide options for commodity data management. You need to use software developed by considered one of such corporations, for environment friendly administration and evaluation of data for predicting the futures market.