Commodities are around us everywhere – when we notice closely, almost everything that we see around us is a result of raw and refined materials being processed by companies and businesses between you and the raw material. But we hardly think about these factors when we are glued to the stock tickers on our digital screens today. However, these commodities have a world, or rather, a market of their own – the commodity market.
If you are fascinated with commodity markets, this line of thinking will also interest you. Have you been thinking about making a head start in trading commodities? If so, then you are at the right place – because that’s exactly what we will be talking about – continue reading to learn more about commodity markets.
Did you know that commodity trading is one of the oldest professions that continue to be taken up by people in today’s world? That’s right. Many years ago, traders used to travel around the world on ships in order to trade commodities. Before that, there were merchants that travelled across the silk route, bringing new commodities like spices, precious metals, grains, etc. Yes, there was a time when commodities moved across markets on foot.
Today’s commodity trader, however, looks very different -in fact, just like you, sitting in front of a screen, reading things like news and reports online, and selling tonnes of commodities at the tap of their fingertips. So what does it take to make a head start in these markets? To be very precise, these three things:
Your commodity trading setup – That’s right. A demat account and a trading account at the very least. Demat accounts are just like bank accounts that store your commodities digitally. Earlier, commodity traders used to store commodities in warehouses – today, you will need to store these commodities digitally in your demat account, just like you keep some money in your digital wallets.
The trading account will enable you to buy and sell these commodities freely to other traders in the market – this will typically happen through and exchange – to connect to this exchange, you will need to select a broker that can help you with online trading. When you open a demat and/or a trading account with a broker, you will need to opt for the commodity trading option while signing up. This will also call for additional paperwork (that can also be done digitally), since commodity trading makes heavy use of margin funding.
Understand how contracts work: Contracts in the stock market? We bet you have either heard about futures and options, or derivative trading. Futures and options are basically contracts, that give you the right or an option to buy and sell commodities at a later date in the stock market – so if your options contract is valid for 13 days, you can choose to buy or sell a security within those 13 days, at a predetermined price that you agreed upon. On the other hand, a futures contract does not give you an option – if your futures contract is valid for 3 days, it means that you will have to sell or buy the underlying commodity before the contract expires.
Many traders use derivatives in the commodities to manage the risk associated with their positions. Others also use commodity futures and options for arbitrage trading. Yet others use them for safeguarding their real, physical commodities from price fluctuations in the market. Understanding how derivatives work will be crucial before you start making bets in the commodity market with your own money.
Understand how commodities markets work: One of the biggest mistakes you can make while starting out in commodities markets is to start out with your real money, and with no detailed knowledge about the commodity you are toying with. In fact, commodities markets are known to be volatile, and exercising caution in these markets is not enough. In order to see growth with commodity trading, you need to understand the ins and outs of how a commodity’s price changes.
While there will be macro-economic factors and trends that affect a commodity’s price, you will need to research more, and stay up to date with the current news. You will be surprised how commodity prices are affected by a plethora of geopolitical factors, economic factors, customer behaviours and even technological shifts.
In order to develop a sharp mind for succeeding in commodity trading, the first thing you should do, is to read extensively about how commodity markets work. The next thing you can do, is to start paper trading, and keep a birds-eye view on international markets through quality news and reports. And next, continue paper trading, while constantly analyzing your positions and trades in the light of the present happenings. Doing a thorough technical analysis of the commodities in your focus will help you in this regard.
So these are the three steps that can help you get a head start in the commodity trading arena. While some people look at commodity markets merely out of curiosity, others wish to explore them in addition to, and beyond their stock market trading practice. For new entrants, it is advised that you should never channel all of your investment/trading capital to commodity markets – doing so can be risky. In fact, a commodity trading practice should be optimised for risk by using it alongside a diversified portfolio.
While it may sound unfamiliar, confusing and risky to you in the first impressions, commodity markets come with some of the most lucrative opportunities for growth in a variety of market conditions. So take charge of this new journey, and make a solid entry into commodity trading – Angel Broking wishes you the best!