If you have listened to talk radio or watched certain cable channels for even a few minutes in the past decade, you probably heard commercials about investing in gold.
Let’s be honest—that may not be the best way to discover investments.
The commodities worth investing is like Gold, Silver, Base metals including Zinc, Nickel, Aluminum etc, crude oil, natural gas, agricultural commodities like cardamom, soybean, clove, pepper etc.
However, before entering the market you should be aware of the fact that investing in the commodities can be very risky and much complicated.
It is not everyone’s game to play.
Multi Commodity Exchange of India Ltd (MCX) offers to trade in varied commodity futures contracts across segments including Bullions, ferrous and non-ferrous metals, energy and agricultural commodities.
Striker Stock Research helps you understand this with the help of our expert Commodity Calls.
The commodity is considered to be the riskiest of all markets.
This is a Lot (a bunch of some quantity) of some quantity of an MCX commodity.
Using futures and other types of investments known as derivatives contracts (like forwards and swaps) allows investors to get some exposure to the commodity on which the contracts are written without buying and storing the actual commodity.
There are substantial risks involved—including the fact that futures contracts can be illiquid at times, which means investors could lose money while waiting to be able to sell their investment.
Fidelity doesn’t offer investments in futures except through mutual funds that use them as part of their managed investment strategy.
This MCX Future Contract has an expiry date (like 19 October 2016, it means if investor trade the contract of this expiry date, this contract will be automatically squared off on 19 October 2016).
An investor can also square it off himself before the expiry date. Different commodity contracts have different expiry dates. Best Digital Marketing Course in Indore.
MCX Future Contracts can be traded in both the directions i.e. can be sold or bought.
It means it is not required to buy before selling the Future Contract.
However, doing online commodity trading is a simple process but only for those who have better knowledge of the market and can understand the charts and fundamentals.
The traditional pattern of doing trading through a broker was really time-consuming and was not much efficient.
Placing an order on call and then waiting for the confirmation of position sometimes creates lots of confusions.
Moreover, if you are investing in the commodities or in commodity futures directly then it will be much risky game to play.
Whether you go for the futures and physical commodity; it will require high levels of expertise and technical understanding.
You should have the deep understanding of the product or commodity you are going to buy or sell as well as you should have technical understanding.
Further, you have to look after all the things, manage all the difficulties with storage, transport, and trading these materials.
Even relatively common commodities like gold coins still require storage, security, and insurance.
And this is just the infrastructure for the commodities markets.
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It doesn’t begin to get at all the forces (weather, shipping disruptions, political changes, etc.) that make the price of commodities and value of the underlying futures contracts extremely volatile.
Therefore, if you want to trade commodities online, there are some important factors to keep in mind.
Many traders trade in commodity futures and options to reap the benefit.
So, in order to earn the profit, you should use proper commodity trading strategies from movement in price.
Commodity trading strategies are plans which are used for buying and selling commodity futures and options to earn profit from the changes in price.
Many traders in the market also preferred commodity tips.
It is very important to build a strategic plan before you begin trading commodities.
This will minimize the chances of risk, thus your capital will not be at risk.
So now if you wish to invest in a commodity market it is important that you get an accurate guidance that is important in order to make money from products like the commodity.
We provide commodity research calls on gold, silver, copper, crude oil, natural gas and all the metals which come under the head of precious metals.
Our dedicated research team would ensure that all your investments give you the best returns hence increasing your commodities.
Types of Traded Commodities in India
When you invest in the commodity market, you may be spoilt for choice.
There are various types of commodities available to be traded in the market. Broadly, they are categorized as soft and hard commodities.
Generally, soft commodity refers to the commodities which are grown in the agricultural farms and do not involve the process like mining from the earth or extraction from other substances.
Soft commodities include commodities like Corn, wheat, soybean, sugar etc.
Soft commodities have a limited shelf life and they are highly prone to damage due to bad weather.
As such, their prices tend to be volatile in the short term.
In fact, the weather plays a huge role in determining the prices of soft commodities.
As soon as the change in a weather forecast appears, the price of soft commodities starts moving sharply.
A hard commodity is a type of commodity that is either mined from the earth or extracted from natural resources.
Gold and crude oil are examples of hard commodities.
However, some of the hard commodities also go through the refining process before placing into the market.
For example, gasoline is produced by refining crude oil.
Hard commodities are easier to store than soft commodities because they are not perishable.
Besides, the weather does not have a direct impact on their production and supply.
However, it is seen in times that the market of hard commodities is comparatively less volatile in the short run than the market for soft commodities.
The prices of hard commodities depend more on global macroeconomic fundamentals, such as GDP growth, industrial production, and interest rates.
The profit expectation from the trading depends completely on the types of commodities you choose to trade in.
This is because time is often a big factor in such decisions.
“Commodities may protect purchasing power against inflation, or in some cases, the inability of fiat or paper currencies to maintain their store of real value,” says Joe Wickwire, portfolio manager of the Fidelity Global Commodity Stock Fund (FFGCX) and the Fidelity Select Gold Portfolio (FSAGX).
Here’s how that works:
The prices of many commodities may increase as inflation rises.
The price rise in a commodity can also be noticed when the demand of consumers increases and then the need for more commodity resources also increases.
Also, if there will be a rise in the price of the commodity like oil then it will initiate a rise in the other parts of the economy. It means that you will have to pay more for groceries, clothes, school supplies, or electronics.
That’s why, when inflation is rising, investing in a broad range of commodities that have the potential to increase in value could help offset some of the price increases associated with rising inflation.
That’s because the commodity investment may potentially increase in value at about the same time.
Of course, commodities can also decline in price during periods of deflation, or when demand for specific hard assets is falling.
What is Options Trading?
The Options trading is a derivative instrument like Futures which derives its value from an underlying asset.
You can find many books which are written on the options or futures trading.
However, I sometimes question the usefulness of the information provided.
It seems that much of the literature available is just creating confusion among people.
There is no clear guidance and actually, it needs a practical approach.
Although a majority of the bewilderment stems from the fact that most option theory is based on stock options trading and the transition to commodities isn’t without its hitches.
In my opinion, the practice of repackaging stock options trading strategy and theory in an attempt to appeal to and educate commodity traders can be misleading.
Additionally, there are large differences between option theory and options trading.
Some of what looks good on paper is difficult to execute efficiently in the real world, this is especially true in the world of commodity options trading.
Here it is commodities such as gold, silver, and crude oil.
The Option is the right to exercise (Buy/Sell) the underlying asset at the strike price on expiration date by paying the premium.
It has two types namely Call Option and Put Option.
A Call Option is the right to buy and not the obligation to buy the underlying asset at the strike price on the expiration date and Put Option is the right to sell and not the commitment to sell the underlying asset at the strike price on an expiration date.
Traders that are willing to accept considerable amounts of risk can write (or sell) options, collecting the premium and taking advantage of the well-known fact that more options expire worthless than not.
The premium collected by a seller is seen as a liability until it is either offset by buying it back, or it expires.
This is important, many beginning option sellers assume that because they receive the cash up front and they can see the amount of collected premium added to the ledger balance on their account statement, that it is somehow theirs.
Until the position is closed, the only thing that is certain is that there is a risk on the table and the trade should be treated accordingly; this is the case regardless of the amount of money collected for the option or the amount of any open profit associated with the option.
Commodity investing raises several practical questions.
Institutional investors are invariably focused on gaining exposure through derivatives, as few could envisage holding pork bellies or gold bars.
Holding futures contracts introduces another source of volatility through the requirement to roll over futures contracts on expiry.
This introduces the issue of roll yield.
Uses of Options:
Hedging in Options Trading
We can use Option in commodities to hedge the Downside and the Upside risks. The Downside Risk is when we have a Long Position in future or underlying asset. The upside risk is when we have short a position in future or underlying asset.
To hedge a long position or to protect the downside risk, Buy Put Option. Similarly, to hedge a short position or to protect upside risk, Buy Call Option.
Eg: If we have a Long Position in gold future at 28200 and we cannot bear more loss beyond 28000 so instead of putting stop-loss we can buy a put option of 28000 strike price of same expiration as the gold future.
We can also bet on the market movements using commodities options.
Eg: If we are expecting the market to rise in the coming week we can buy a Call Option. Also, if we are expecting the market to fall in the following week, we can purchase a Put Option.
Real Time Scenario:
Here are our assumptions:
Gold future current rate = Rs.28200
Many people are not aware of how trading can be done in the commodity sector and how big profits it can help you make.
Striker Stock Research helps you understand this with the help of our expert Commodity Tips.
The commodity is considered to be the riskiest of all markets.
So now if you wish to invest in a commodity market it is important that you get a guide that is important in order to make money from products like a commodity.
We would provide commodity tips on gold, silver, copper, crude oil, natural gas and all the metals which come under the head of precious metals.
Our team would ensure that all your investments give you the best returns hence increasing your commodities.
Striker Stock Research specializes in its services related to the commodity through the demo and backs up calls.
Our proper follow-ups would keep you informed about the new developments that take place and the 24*7 customer service is available for resolving all your queries related to the investments you wish to make or ones which you have already made.
What is Square Off?
It means selling if you have bought or bought if you have sold an MCX Commodity Future Contract. It is called exiting from a running trade.
Why do we Square Off?
If we want to book profit or loss, then we have to square off our position.
We can square our position partially also. Let’s say an investor having 5 Lots of Crude Oil.
The investor can square off 1,2,3,4 or 5 Lots at a time. Partial square off is done to book profit or loss partially.
On expiry date square off will happen automatically.
Long Trade and Short Trade (or Short Selling)
When a trader buys something, it is called Long Trade and when a trader sells something without buying it, then it is called Short Trade (or Short Selling).
Stop Loss Order
Stop Loss Order is a buy or sell order, which is placed to limit the loss.
It is placed in the opposite direction of our position.
If a trader is having a long trade then sell order will be placed and if a trader is having a short trade then buy order will be placed. MCX Commodity
This order is placed at a trigger price.
As the spot price becomes equal to this trigger price, Stop Loss Order will be executed and the trader will be out from his position. MCX Commodity
Let us say spot price of a commodity is ₹ 100.
We are planning to take risk of 5% then there will be two cases.
In the first case say the trader is having a long trade then he will place a Stop Loss Order at ₹ 95 and in the second case say the trader is having a short trade then he will place a Stop Loss Order at 105.
These prices ( ₹ 95 and ₹ 105) are called trigger prices.
What is a ‘Lot’?
A lot is a bunch of some quantity of a commodity.
Let us take an example; mega contract of MCX Aluminum contains 5000kg quantity. MCX Commodity
This 5000 kg quantity is called Trading Unit or Lot Size for this Aluminum Future Contract.
In this ‘kg’ is called Base Value for this Future Contract. MCX Commodity
The price of the commodity we see in the market is for this Base Value only.
If in the market we see the price of Aluminum ₹ 105, it means this is the price of 1kg (i.e. Base Value) quantity of Aluminum.
If a trader wants to trade commodity then he can only trade whole Lot.
We cannot trade 4500kg of Aluminium in Stock Market; we have to trade in multiples of Lot Size only. MCX Commodity
There are different Lot Size and Base Values for different Commodity Future Contracts.
To know the Lot Size and Base Value of Commodity Future Contracts you can follow the link.
Is there commodity of only single Lot Size?
No, there are generally two types of Future Contracts for each commodity according to the Lot Size, Mini, and Mega Future Contracts.
Like for Aluminium Mini Future Contract has Lot Size of 1000 kg. MCX Commodity
To know the Lot Size of Mini and Mega Future Contracts you can follow the link.
How do I avoid this risk?
I avoid risk by taking more accurate trades and limiting my position size.
My Unique Trading System (UTS) generates less trading signals but more accurate. MCX Commodity
I have developed a calculator to calculate the permitted maximum number of Lots can be traded.
This is developed on the basis of some factors of commodities price fluctuations.
In my calculator what it is required to enter only the amount, I want to invest. MCX Commodity
The initial margin in commodity trading
Initial margin is the amount that you have to deposit with your broker before you can start trading in commodities. MCX Commodity
The amount of initial margin depends on the commodity you want to trade in and the exchange that you will be trading on.
In most cases, however, the initial margin requirement is 5–10% of the contract value. MCX Commodity
Let us say you are trading in a commodity futures contract worth Rs 10,000.
The margin requirement for the commodity you are trading in is 5% on your exchange. MCX Commodity
In this case, you need to deposit a margin of Rs 500 (i.e. 5% of Rs.10,000) before you can start trading.
The margin requirements ensure that your account always has enough money to settle the trade if you make a loss. MCX Commodity
If you incur a loss while trading in stocks, your shares simply fall in value.
They may fetch less value when you sell them, compared to the rate at which you bought them.
But you do not have to pay anything to your broker. MCX Commodity
In commodities trading, your position is mark to market every day.
This is when your Margin account is adjusted to take into account the day’s market change. MCX Commodity
Whatever profit or loss you make will be in your account.
If you make a loss, your account balance reduces by the amount of the loss.
This is why you need to start with some balance in your account. MCX Commodity
The initial margin allows your broker to debit your loss instantly from your trading account.
Maintenance margin in commodity trading
As your losses mount, the balance in your trading account falls.
If this balance falls to a predefined threshold, the broker may ask you to top it up. MCX Commodity
The predefined threshold is called the maintenance margin. MCX Commodity
The money you have to bring to replenish your account is called margin money.
When you make a profit in trading, your account balance rises above the margin requirement. MCX Commodity
You can withdraw the excess amount in your account if you like.
Continuing with the earlier example, let us say your exchange requires a maintenance margin of 3% for the commodity in which you are trading.
In this case, you have to maintain a minimum account balance of Rs 300 (i.e. 3% of Rs 10,000) at all times.
Now for an instance, just suppose that you are losing money constantly on your investment and now you have only Rs. 280 in your balance. MCX Commodity
But you know that you should have Rs. 300 as a maintenance margin. Now your broker will give you a margin call.
You will have to deposit money to replenish your margin. MCX Commodity
Advantages of Investing in Commodity Market
Many of the traders in the market considers the commodity trading much risky.
The complexity and volatility of commodity markets deter people from investing here. MCX Commodity
But it will be very beneficial for your portfolio if you have a well-planned commodity investment.
It also offers a host of benefits.
Commodities can diversify a portfolio.
Commodity returns usually have low or negative correlations with the returns of other major asset classes. MCX Commodity
Very often, when there is a fall on bonds and stocks, there is a rise in commodities.
Sometimes, there may not be any connection between the returns at all. MCX Commodity
However, the factors that affect the returns on stocks and bonds not necessarily affect the returns on commodities in the same manner.
Besides this, the commodities may react differently from other assets in various economic and geopolitical situations. MCX Commodity
For example, the prices of stocks may fall during a financial crisis.
But gold prices may rise as demand for this safe asset increases.
A diversified portfolio with a low correlation between its assets tends to have less volatile returns.
Thus, your investment in the commodities ensures diversification and also it enhances the risk-adjusted returns. MCX Commodity
Inflation has a different impact on commodities than financial assets like stocks and bonds. MCX Commodity
The reason behind this is that inflation results in the depreciation of the currency.
This erodes the real value of financial assets like stocks and bonds.
Commodities, however, maintain their value and price even during high inflation. MCX Commodity
In this environment, investors can turn to hard assets such as gold and other precious metals.
Hedge against event risk
The events like a natural calamity, wars and economic crisis can lead to a depreciation of the asset of an investor.
This is an ‘event risk’. Such events affect financial assets like stocks and bonds negatively. MCX Commodity
They may also lead to a rise in the prices of certain commodities.
For example, supply disruptions due to wars may raise the prices of commodities like oil. MCX Commodity
So, these commodities may act as a potential hedge against some event risks. It may consider as a buffer against losses.
Unlike investment in assets like real estate, investment in commodity futures offers high liquidity. MCX Commodity
It is easy to buy and sell commodity futures.
An investor can liquidate his position whenever required.
Trading on lower margin
The investor who trades in commodity futures has to deposit a certain amount as a margin with the broker. MCX Commodity
The margin can be close to 5–10% of the total value of the contract.
This is much lower than the margin required for other asset classes.
Thus, the investor can take larger positions while investing less capital.
This also helps increase the potential for high profits.
Commodity markets are volatile.
Traders here have to handle the huge swings in prices.
For example, the war in a major oil-producing country like Iraq can cause oil prices to shoot up. MCX Commodity
Smart investors can take advantage of these price swings to make gains.
Well-planned commodity investments can provide higher returns than investments in other assets. MCX Commodity
Not everyone wants to—or should—invest in commodities.
Many of the investors are of the thought that diversifying among different types of stocks and bonds is all that is necessary. MCX Commodity
However, you don’t have to own a lot of this asset class in order to get the potential diversification and inflation-fighting benefits. MCX Commodity
So, if you think it may be a good idea to include commodities, based on your personal risk tolerance and investment objectives, then allocating even a relatively small portion of your investment mix to commodities may be worth considering. MCX Commodity
Each type of strategy has advantages and disadvantages, so it is up to the trader to choose which type of strategy might work best.
Range Trading Strategy:
Range trading in commodities means attempting to make purchases near the bottom end of a range i.e, support and selling at the top of that range i.e, resistance. MCX Commodity
The ability to buy a commodity after selling makes the price fall to an oversold condition is the basis to succeed in this strategy.
The term oversold means that the market has absorbed all selling and buying is likely to emerge. MCX Commodity
There is a number of indicators which can use to measure overbought and oversold levels like the Relative Strength Index, Momentum, and Rate of Change metrics. MCX Commodity
When the market has no definable and consistent trend then these strategies work well. MCX Commodity
Basically, the risk of range trading is that the market moves below technical support or above resistance.
In the world of commodities, this strategy centered on trading breakouts.
It means that a trader will look to buy a commodity as it makes new highs or sells a commodity as it makes new lows. MCX Commodity
On a chart, one can easily spot new highs and lows, as they are the peaks and troughs of previous moves.
Many professional traders use these techniques when they are managing large sums of money and looking for a major trend to develop.
Commodities are volatile assets and it is not uncommon for them to double or half in price or more over relatively short time spans.
Fundamental Trading Strategy:
This trading strategy used while trading in breakouts and ranges.
And trading in breakouts or ranges usually has specific rules as to when to buy and sell. MCX Commodity
The fundamental trading depends on few factors that will affect supply and demand for the commodity in need.
Traders and investors who are new to the market will face difficulty with fundamental trading as it needs a huge amount of homework. MCX Commodity
A stock market advisory plays a very important role in a trader’s life, as it gives the idea about market performance and trend to them. MCX Commodity
In reality, the futures price can swing wildly relative to the spot price and can be lower, giving rise to so-called backwardation, as opposed to the normal contango position where the commodity futures price is above the expected future spot price. MCX Commodity
Backwardation happens because you can not borrow commodities generally and require storage costs.
Futures prices also reflect the supply and demand in the market, with producers generally hedging risks by selling futures contracts to risk-taking investors. MCX Commodity
Rolling futures in conditions of backwardation means investors generate a positive roll yield which, proponents of commodity futures have argued, transfers risk from producers to investors.
In fact, we are one of the early players in this business and have built a very strong research.
However, our customer base widely acknowledges it, be it the corporates or the traders who comprise our prime customer segment.
Further, we are by far the only commodity trading entity who have a presence in the wholesale markets.
Moreover, here they auction commodities purely to get a very strong sense of the demand-supply for most of the agricultural products.