Commodity trading demystified

In today’s market, if you think that shares and bonds are your only option for playing the market, well, you are far from the truth.

You may be thinking that if this is about the commodity market, then, I may as well shut up and move on. Here the underlying assumption, as held by most of us, is: derivative markets are for extremely risk-loving people who have a deep and experienced understanding of the derivative class as an investment category.

So, are we going to leave an entire class of investment just slip away just because we think we don’t know or are we going to do something about it? If you are interested in investing in the market at all, then why fight shy without a little try?

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• Step 1: what is “commodity trading”?

If you have ever placed a bet on anything, you’ve already participated in a commodity trading. Let me explain: you betted with your brother that if India wins the Border-Gavaskar Test series, you’re going get Rs. 100 from him and if otherwise, you’re going to pay him the same. Here, your money is basically a commodity or derivative product, based on the performance of the underlying security (the test series), you are chancing upon a profit.

Financially speaking, a derivative is a product whose price depends upon the performance of another product. If the share performs well, its derivative will earn you profit, depending upon your bet.Online commodity trading has made this whole process a hassle-free way to invest.

• Step 2: speculation

Suppose you have reasons to believe that the star fast bowler of Australia will not bowl as much in the final test as he was supposed to. And your brother does not think like this. With this assumption you placed the bet as if India wins, you’re winning a hundred. And that’s what happens. This is called speculation.

In derivatives’ terms, suppose you think the price of AA share will go down very soon. You buy 100 shares and make a contact with another investor that you will sell him the shares at today’s market price by tomorrow. And the prices fall, by the contract, you win some handsome profit: speculation well done!

• Step 3: Hedging

Suppose you’re a florist. If the price of dozen roses, currently Rs. 120, goes up to Rs. 144, you will have to face lose. However, the less the price goes the more profit you’ll earn.

Conversely, for your supplier, if the price goes bellow Rs. 96, he’ll go out of business and the more the price, the better for him.

Now you and your supplier make a contract that no matter how far the price goes up or down, you’re going to purchase at the range of Rs. 108-132. This way, you both secure some profit and therefore ‘hedge’ or protect yourself from loses. When you do this through a derivative contract, it’s called financial hedging.

There are many derivative products available in the market. Just with a clear idea regarding how the underlying asset is behaving, you can make some handsome profit.

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Learning the Commodity Trading Lingo

Ahead of understanding the definition of commodity trading, let us first clear our basic concepts. This will help hugely to determine exactly how commodity dealing is done.

What exactly is a commodity?

Commodity is an item that offers little separation originating from one maker or from an alternate maker – a barrel of gasoline is fundamentally the same item, no matter who the maker is.

What is the origin of commodity trading?

Rice prospects have been exchanged with China dating back to 6000 BC. Old human advancements exchanged a wide show of things, including animals, seashells, flavors and gold. In spite of the fact that the nature of item, date of conveyance and transportation systems were regularly temperamental, commodity trading was a crucial business. Many of these fields can be seen as proportionate to their manufacturing capacity. Complex trading frameworks were also introduced and commodity exchanges were encouraged. These served as the wheels of trade, monetary advancement and tariff for the kingdom’s treasuries.

What are the classifications of commodities?

There are four classifications of trading items which include:

Energy (counting raw petroleum, warming oil, common gas and fuel)

Metals (counting gold, silver, platinum and copper)

Animals and Meat (counting lean pigs, pork tummies, live dairy cattle and feeder cows)

Horticultural (counting corn, soybeans, rice, cocoa, espresso, cotton, wheat and sugar)

In India, commodity trading is done in metals, energy and agrarian items. Commodity trading is by and large done in the future market. Prospects business sector is one where I consent to buy an item after a positive time of time at a foreordained cost.

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‘Futures’ of Commodities

Forward contracts are a common practice with items. Cultivating cooperatives likewise use this system. Farmers, who are unaware of the storm forecast for that year, need to fence their danger against the rainstorm. They go into an agreement with an extensive MNC who consents to buy the commodity at a foreordained cost. By settling the value, the agriculturist has supported his wagers against the storm rage or dry season and secured his salary from cultivating.

The Gold Standard

Trading in valuable metals (like Gold) can be utilized as a support against high swelling or in times of money downgrading. Gold has been truly seen as a solid, reliable metal with conveyable quality. Gold can be utilized to support your portfolio chance in occasion of economy downturn. Gold costs moves contrarily with Dollar esteem. All these trends can be followed when you are doing commodity trading online.

Sorted out Commodity Trading

With commodity trading assuming a crucial part in worldwide financial markets and influencing the lives of the vast majority of the individuals on the planet, ‘Futures’ are availed out of commodity exchange on sorted out trades and are largely institutionalized. This way of trading is called a Sorted out Commodity Trading.

There are a few approaches to end a Commodity contract:

The individual on the “short” side can end the agreement by conveying the merchandise and the individual on the “long” side can end by tolerating the conveyance and paying the agreement cost. Notwithstanding, conveyances speak to 1% of agreement end.

The greater part of the commodity prospects contract include money settlement. You offer the counter-party the distinction in the normal estimation of your wagers.

Purchasing commodities can quickly degenerate into gambling or supposition every time a dealer makes uninformed decisions. On the other hand, by utilizing commodity futures or hedging, buyers as well as company organizers can protect themselves at difficult times.

The Origins of the Share Trading Business

In ancient times, when business was not as evolved as it is now, people ran their businesses by using their own money. At most, it would involve the money of all the members of the family, making it a family business. This made the scale of the businesses they ran, small. Less money invested meant that the scale of the business was small and led to smaller profits. Definitely, there was growth in their business, but it was minuscule. However, things have changed now. You can borrow loans from banks and invest much more than your family’s money in your business. So far so good! But there is a catch here – What if you want to set up a factory, which will require you to invest a million dollars? Would any bank lend you a million dollars? What is the guarantee you would provide the bank against borrowing a million dollars? So, should you pack up and leave? The answer is a ‘No’. There is a solution – The Share Market! We will discuss more on this here. Read on.

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Let’s look back on history to know how it all began. The European invasion and imperialism started at around 15th and 16th centuries. There were sailors funded by the kings of their respective countries, who set sail to find and capture new lands or to capture them. During this pursuit, the Asian and African countries were mostly targeted. As the competition among the sailors grew and the funding from the Kings became scarce, the East India Company became the first one to issue shares at Amsterdam to collect money from common people and provide them returns. This was the beginning of Stock Market and Share Trading as we call it today.

Now let us delve deeper into the jargon we use when we discuss about the share trading business. The first question that comes to our mind here is that what is a Stock all about?

In simple terms, a Stock of a business or company will give you a share of that company’s profits that will be gained in future. This will be in return for the money you have invested in their business. For example, you purchase one stock of a company, say X, now, you will be entitled to one-billionth of X’s gains in the future because the company has issued one billion stocks until now.

The second thing that one should to know is the Listing.

It refers to the thousands of companies that have registered themselves in the stock market. The first time when a company has its stock in stock market’s board is referred to as an Initial Public Offer or IPO.

Finally, there are the Brokers. These are the main people or the faces of the share market. They connect the people to the listed companies. They help people in carrying out the buying and selling of shares in the stock market.

Share trading becomes simple if you have a good foresight and find dependable people who charge the cheapest brokerage and provide the best services.

Role and responsibilities of stock broker

In generic terms, the role of a stock broker is restricted to the buying and selling of shares. If one needs to become a stock broker, they need to pass the General Securities Representative Examination. Stock brokers tend to offer different level of services to the clients. First and foremost, he needs to be aware of the trends relating to the stock market. In fact, his expertise should be up to date with the latest happenings in the world of stocks. So, it is indeed important that one needs to avail the services of good stock broker to keep themselves safe in the share market.

The role of a stock analyst and a stock broker may seem the same, but on careful evaluation, one can find a thin line of difference between them. A stock analyst is an individual, who can give you valuable tips on the investment process. One should keep in mind that a stock analyst only does an analysis of the stock, but does not undertake buying or the selling of shares at any point of time. A stock analyst is likely to analyze the market trends and may provide an insight on how the market will look in the coming days. He might also predict how specific stocks are likely to perform during day trading. So, here the difference between the two can be clearly analyzed.

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Brokers are known to earn their commissions through the selling of stocks. When you tell your broker to undertaken certain buying or selling of shares, they are likely to charge a certain commission on the transaction. In the stock market, two types of brokers are present who are discount brokers as well as the Full service brokers. The former does not offer any piece of advice, as well as, does not undertake any form of research. Whereas the full service brokers provide you with valuable advice and they charge commissions, as well. So, it is up to you whether you choose which type of broker. But, in hindsight, one needs to be aware the roles along with the responsibilities of a stock broker to get the required information.

If you are looking for the best online trading brokerage firm in India, then do a review before opting for one. Quite often, it is seen that there is a conflict of interest between an individual and the client. Imagine such a scenario where you want to sell a stock and the broker is standing in your way as he feels that it is not a lucrative investment option. The alarming bells tend to ring when the same stock makes substantial returns in the coming days. So the brokers along with an individual should work hand in glove with each other so that both their interests are taken care off. An ideal broker is one who takes the interests of their clients into consideration and work for the mutual benefit of both the parties.

Benefits of commodity trading

While a majority of us prefer to invest in stocks, there are many who follow a different school of thought. Where investment in gold along with silver works during the time of inflation and provides a host of benefits during the turbulent economic times, on the flip side, investment in commodities is considered a risky proposition sometimes. However, this does not mean that you will not include commodity trading as part of your investment portfolio. Investment in commodities requires you to be knowledgeable and at the same time familiar with the market. They work out to be a hedge against inflation, and moreover can be held for a longer time span. In fact, in recent times, commodity trading online has virtually gone places because of the convenience factor.

Investing in commodities provides you with a diverse investment portfolio. If you are already investing in stocks along with bonds, then going ahead with commodities may not be a bad idea. In a way, all your investments are not stacked in a single place and one can make up for the other. It is a risky form of investment where prices tend to swing considerably. Companies normally experience heavy losses or are on the correct form of discovery path. If you plan your investments right, the chances of one making reasonable amounts of profit are all the more.

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When the economy is witnessing a downward curve, there is an automatic fall in the value of the rupee. During times of inflation, the prices of commodities tend to shoot up, and so too the prices of the raw materials see a paradigm shift. It is a common notion that a few commodities will help you to take advantage from this upswing. Trading in commodities is also a transparent process. There is a scripted course of action where there is participation on a large scale. When there is a large participation, different points of view are likely to emerge and a broad outlook emerges relating to the commodity. If and when the money becomes less valuable, one would need greater amount of money to buy commodities from various corners of the world. The situation during inflation becomes all the more so when people tend to dismantle their stocks along with bonds and diversify into the commodity market. So, it is quite obvious that one can benefit from such an endeavor as it is known to act as a potential hedge against risks.

The beauty of the commodity market is that you can trade in on small margins. Normally, as a trader, you need to have a deposit with your broker, which is in the region of 5% to 10% of the total contract value. This is relatively lower when one compares it to the other asset classes. So, one can take larger positions at a much lesser capital.

To make it big in the commodity market, you need to be thoroughly educated and the web is the perfect platform where you can find information pertaining to it.

Benefits and loopholes associated with online commodity trading

The lure of trading commodities online has been a god send gift to many and a nightmare to others. One can expect quick execution of their trades with an online broker and timely commissions, as well. There is an element of independence when you opt the online route. However, all is not a bed of roses as they are some potential dangers that many novice tend to overlook when they open an account to trade.

Trading online commodities is a one stop solution. One has virtually everything when they log into their trading account. Most online commodity brokers will have charts, technical analysis, quotes along with future news available for their clients. This has provided a new window of opportunity for the online traders to make more of the trading decisions, as well as implement trading strategies that were not available to the average retail trader at one point of time. If one is trading futures, as well as commodities, they will want to trade it online until and unless they have someone to look after their trading accounts. Executions are much more instant, rather than picking up a phone call and call your broker to place orders and moreover wait for the price to fall, as well. This is also accompanied by low commissions. This paves way for more spreads, as well as evolution of new strategies. This is the case with day trading, as well as short term trading.

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There are two main issues confronting online futures trading. First and foremost, you do not have anyone at the back of you to help and monitor your trade activities. Many new traders will make foolish mistakes that will cost them their hard earned money. If you have an experienced broker, you can discuss strategies with them, which will keep you out of trouble, as well as make up for the commission savings concerning online trading. As with any new venture having a mentor can be an invaluable experience. Just being able to ask a trade question and having a reply from a professional is indeed a privilege. The problem is compounded by the fact that many traders take for granted on how much they can earn from their brokers, and moreover, how much time and effort is saved, as well.

The second major issue is the evergreen problem of over trading. This has been a problem plaguing the online commodity traders for a considerable amount of time. As the markets tend to rise up and down, they are of the notion that they can capture the moves by getting in and out as and when they want. Since the commissions are cheap, it works out to be an easy proposition, as well.

To sum it up, online trading has a lot of advantages. But one must exercise caution , be well disciplined and have a sound investment plan.

Stock exchange trades are easy and cheap!

Trading in stocks and commodities is no longer the privilege of just the people who have attained a complicated, master’s degree in finance or commerce. India has seen some of the busiest trading in commodities like gold and silver and has a wide variety of stocks that are traded online and in the stock exchanges every single day!

In order to make online share trading such a lucrative business, it is important to make the common man believe in the power of this tool to earn extra money. And the best of roping in the common man is by making things easy to understand and inexpensive for him. That is why, even the cheapest stock brokerage online will be able to yield good results because the brokerage firm is interested in retaining its customers and attracting new ones.

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Why does on need an online brokerage account?

Gone are the days when stock brokers fought vicious and loud wars on the stock exchange floors to make themselves heard over the other brokers battling it out every single hectic day. Nowadays, everyone is able to do certain amount of transactions online. If you have joined hands with a reliable stock broker, then you can receive various helpful tips from time to time about the performance of various shares spread over a number industries.

When you have an online account:

1. You can easily perform trading transaction like buying and selling from anywhere are any time. You need not call your broker to carry out these transactions for you.

2. The online account will provide tips about trading so you can keep yourself updated about the performance of your trades and your selected shares at all times.

3. Finding multiple alternatives or details about other interesting shares becomes much easier. After all, the account is a storehouse of information and trading reviews about other shares too. So, you can compare the shares and select new shares that you may wish to trade in.

4. The brokerage firm where you have an account has a specialist team of analysts and reviewers, who collect information from all over the world and prepare very helpful reports for you. For those, who are interested in trading in shares, but are unable to find the time to do so, this is a very helpful service because all the background work has already been done.

5. Commodities and shares are given equal importance. Thus, if you want to trade in commodity stocks too, you can have a good combination of these and trade in all at the same time.

6. You can review reports for a period of time, say the past year or even more than that, if you want to ascertain if shares of a particular company are really stable enough to trade in or if they have high return on investment rates.

Compare the performances and fees associated with such accounts and select a good brokerage firm to start trading in shares today!