subject: What is commodity Trading? [print this page] Commodity trading is an investing strategy that involves buying and selling of commodities. Commodities are defined as something that is considered to be of value, has a quality that is standardized, and is produced in large amounts. When people invest in commodities, they usually think in terms of commodities' that are resources that may be purchased for a wide range of uses. For example, metals whether precious or non-precious, are considered a commodity and traded on the basis of the wide range of goods that can be produced using them as a key ingredient.
Who invests in Commodity Trading?
Commercials: Entities involved in the production, processing or merchandising of a commodity. In commodity trading, both the farmer and the company for example ITC (a leading FMCG firm), which procures wheat from the farmers, could be termed as entities.
Investors: A group of investors that pool their money together to reduce risk and increase gain.
Retail Investors: Individual commodity traders who trade on their own accounts or through a commodity broker so as to take advantage of the price fluctuations.
Why Commodities Trading?
Commodities is the only asset class that is negatively correlated to bonds, making them an essential tool for diversification. Generally speaking, bonds are only minimally correlated with stocks, but commodities have actually been negatively correlated to both stocks and bonds historically. In other words, when stocks and bonds increase, commodities tend to decrease.
How Commodities Trading works?
Say, if you want to take advantage of rising gold prices, a far better way is to invest in gold via gold futures from the commodities exchange rather than actually going to the market and buying it.
As far as gold future trading is concerned, you undertake three things.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month or more.
Pre-requisites of Commodity Trading
In order to trade commodities, you must first learn about contract specifications of each and every commodity as mandated by the exchange, and of course learn about trading strategies. Basics remain the same as any other investment buy low and sell high.
Just like equity trading, Investors are required to open a trading account with a broker or sub-broker; documents establishing address and identity proof are required. While brokers vary on the documents required for proof, most insist on a PAN card as proof of photo identity. Bank account details are also asked for enabling remittance and payment.
Commodities Trading in India
Commodities traded in the commodity futures market during 2009 included a variety of agricultural commodities, bullion, crude oil, energy and metal products. Several new commodities were introduced for futures trading in 2009, such as almond, imported thermal coal, carbon credits and platinum. The main commodities exchanges are NCDEX and MCX. More and more stock brokers are setting up commodity brokerages as well.
What is commodity Trading?
By: Anjali Shukla
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