7 February 2021

How to trade futures commodities

By DICC Institute

A lot of people are familiar with the term commodities for those who are not sure about its definition I would define commodities as a standardized product such as some expensive oil, gold, silver etc. which are used in manufacturing process around the globe. These are mainly used as the exchange products between different investors and of the financial institution. Commodities have various other products related to it. All these added products are also used for the exchange product in the huge investment sector. The traders which are associated with the commodities mainly seek for quick profit when the price goes up as well as down. All the commodities are traded online thanks to the excellent internet service that mainly act as the backbone here. There are some risks associated with the trading of commodities so before any individual gets involved with such field, he or she must process a good knowledge regarding all the important terms, conditions, risk factors and much more.

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The field of commodities has been around us for a long time now. Still, many people are too scared to get engaged with the domain. If we discuss in brief then commodities are responsible for the exchange of sold future contracts so that the manufacturers, as well as farmers, could be able to buy some contracts that will be useful in having a guarantee of the price in which the input of production will be done in the future. This is very important in case of farmers mainly. The commodities are used by the respective players for their purpose many times but now as it has entered in the main market this is mainly used to bet the changing prices of product related to various security factors.

Also Read: How to Invest in the Stock Market and Stock Market Holidays 2021 India

Commodities mainly include these types of product. Such as:

  1. Energy associated products like crude oil and natural gas as well
  2. Metal including gold, silver which are precious and non-precious metal too.
  3. Livestock including meat of cow, cattle, goat etc.
  4. There is even agriculture product such as corn, wheat, rice and sugar.

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Commodities future trading:

Let’s now talk about the commodities future this mainly is bought as well as sold in form of commodity exchanges. Many things are associated with the commodities such as exchange like the New York Mercantile Exchange (NYMEX), London Metals Exchange (LME), Chicago Mercantile Exchange (CME) and much more than that. When we talk about India then this mainly takes place with an exchange like Multi-Commodity Exchange (MCE) and the National Commodity and Derivatives Exchange (NCDEX) and many other. Lets us see some of the features of the commodities future:

  1. The first one that we will talk about is the exchange. The commodities trading is a very organized task which takes place in commodity exchange is a form of NYMEX in the country USA and the form of MCX, NCDEX in the country India. We’ll all countries have their exchange type mainly. This may be due to some security reason, I guess.
  2. The second feature is that the commodities are quite standardized. All the contract has some set of regulated standards that should be followed. Here the quantity, quality, price as well as time is been recognized by the exchanges through which they are being traded.
  3. The third feature is the leverage. Before the individual get started with all the trade in these futures, the person needs to deposit a certain amount as the initial broker. This is mainly considered as the percentage of individual exposure.
  4. The fourth feature that the commodities market is quite regulated. The market is mainly monitored so that the practices remain quite fair. This is done due to some serious security reasons. 
  5. The fifth feature is the physical delivery. In this, the buyer has the choice of whether to accept the physical delivery or not as the contract may expire in some time.
  6. The sixth feature is a zero-sum game. So, in commodities future, if one person wins then it is sure that the other people lose.

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Now let us see some advantages and disadvantages of commodities future:

Advantages:

  1. The first thing is price discovery
  2. The second thing is the standardized procedure
  3. The third thing is hedging
  4. The fourth thing is this is a great advantage for investors

Disadvantages:

  1. The first thing is leverages
  2. The second thing is volatility
  3. The third thing is speculation

Conclusion:

In trading using the commodities future is having many advantages. There are high chances that the individual will have a lot of chances to make a great profit as many commodities have will continue in great demand for many years coming ahead. However, the risk is quite high. As per many people you should participate in commodity trading if you have the appetite to take some risk in your life as that will keep you going here. 

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