Commodity trading


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For full text go to : Have you wondered how commodity trading works, its prerequisites, the various commodity exchanges and if commodity trading is beneficial? This article answers all these questions, read through and get yourself educated on the same.

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Commodity trading

  1. 1. Commodity Trading ~ By edu CBA
  2. 2. What is Commodity Trading? • Commodity trading is an investment strategy that includes the buying and selling of goods called commodities. • A commodities derivative is where people just speculate on the trend of the price of commodities to generate profit if the price moves in their favor. • For instance if you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price and it also does not necessarily mean that you would buy the huge bulk of physical commodity because the contract would end before its expiry date.
  3. 3. Commodity Exchanges • Commodities are traded primarily on the exchange such as the Chicago Board of Trading (CBOT), London Metal Exchange (LME), Multi Commodity Exchange of India Limited (MCX) and many such where several commodities and derivatives products are traded. • These exchanges are standardized in nature and decently regulated. • An exchange plays role of an intermediary to all commodity dealings, and takes initial margin from both sides of the trade to act as a guarantee.
  4. 4. The Good side and the Bad side of trading commodities • Over the years commodity trading is gaining popularity because of the various benefits it offers. • Commodity futures are universally accepted to be a part of every successful and diversified investment portfolio. • Apart from that commodity provides liquidity; require small investment, gives quick profits and hedging options which make it attractive to investors. • Commodity trading has been considered as something just for the experts as it is a risky venture. • The risk factors such as variability in the prices, the volatile nature of quantity of output that can be obtained after the production process, and various other factors such as weather, foreign exchange rates, national monetary policies, inflation etc. related with the commodity trading may affect the returns.
  5. 5. How Commodity trading works? • It all starts when you buy a futures contract of any of the commodity being traded on the exchange. Here you do not pay the entire amount of the commodity but only the fixed percent of the cost, which is known as the margin. • You could sell this contract any time before expiry of it. The expiry could be after one month, two months and so on. Only if you sell the of course contract before it expires, you don't have to worry about really buying the gold. • As stock prices are quoted on a daily basis in the stock markets in the same manner the commodity futures prices are quoted on the commodity exchanges
  6. 6. Pre-requisites of Commodity trading • Familiarity with various order types and how to properly place each of them is crucial to being a successful trader. Irrespective of whether you trade online or through a broker, knowing the type of order and placing it accurately is vital. • Commodities have been allotted respective lot sizes to avoid any confusion in trading .The profit or loss you make is ascertained on the number of lots you have. You can buy or sell any number of lots depending upon your risk appetite and margin you have with your broker. • You will have to find a commodities broker but that is not big problem. There are many brokers that offer commodity trading these days. Brokerage fee is also low for commodity futures.
  7. 7. Trading tips • Define your limits and do not overtrade. • Decide on your profit goal and only then take a position. • Don't try to trade many markets with small capital. • Use discipline to remove impulse trading. • Train your mind to accept many small losses and for large gains. • Don't trade on rumors. • Always use stop orders. • Traders and brokers are highly distinctive when it comes to trading strategies. They should follow and trade with the trends, rather than attempting to pick tops and bottoms. • Money management techniques need to be applied to trading.
  8. 8. Knowledge is like a line with no ends… To know more on this topic click on the link below s/commodity-trading/
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