Earlier than we understand about commodity trading, let us know what commodity means. A commodity is anything within the market, on which you can place a value. It may be a market item equivalent to food grains, metals, oil, which assist in satisfying the needs of the supply and demand. The value of the commodity is topic to differ based on demand and supply. Now, back to what is commodity trading?
When commodities comparable 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 monetary gain, then it is called as commodity trading. These could be traded as spot, or as derivatives. Note: You may also trade live stocks, corresponding to cattle as commodity.
In a spot market, you purchase and sell the commodities for instant delivery. Nonetheless, in the derivatives market, commodities are traded on varied financial principles, corresponding to futures. These futures are traded in exchanges. So what’s an change?
Exchange is a governing body, which controls all of the commodity trading activities. They guarantee smooth trading activity between a purchaser and seller. They help in creating an agreement between buyer and seller when it comes to 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 completely 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 concerned within the contracts do not resolve the phrases of futures contracts; but 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 bring large profit, in short span of time. One of many most important reasons for this is low deposit margin. You find yourself paying anywhere between 5, 10 and 20% of the total value of the contract, which is far decrease when compared to different forms of trading.
2. Regardless of efficiency of the commodity on which you’ve invested, it is less complicated to buy and sell them because of the great regulatory system formed by the exchange.
3. Hedging creates a platform for the producers to hedge their positions based mostly on their exposure to the commodity.
4. There is no such thing as a 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 is a elevate in demand for a selected commodity, it gets a higher price, likewise, the other way too. (may be based mostly on season for some commodities, for example agricultural produce)
5. With the evolution of on-line trading, there is a drastic progress seen within the commodity trading, when compared to the equity market.
The data concerned in commodity trading is complex. In in the present day’s commodity market, it is all about managing the data that is accurate, replace, and contains information that enables the client or seller in performing trading. There are lots of corporations within the market that provide options for commodity data management. You can use software developed by one of such companies, for efficient administration and evaluation of data for predicting the futures market.
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