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All You Wanna About “Commodity Trading Account”

What is Commodity trading account?

Who buy and sell equities, commodity trader’s focus on investing in commodities. These traders either takes positions based on forecasted economic trends or arbitrage opportunities in the commodity markets. Oil and gold are two of the most common traded commodities, but markets exist for cotton, wheat, sugar, cattle, pork bellies, lumber, silver and other precious metals.

Commodity Market:

A commodity market is a physical or virtual marketplace for buying, selling and trading raw or primary products, and there are currently about 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (such as gold, rubber and oil), whereas soft commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans and pork).

Types of Commodities

Today, tradable commodities fall into four categories. They include:

  • Metals (including gold, silver, platinum and copper)
  • Energy (including crude oil, heating oil, natural gas and gasoline)
  • Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
  • Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)

How to Invest in Commodities Futures

A popular way to invest in commodities is through a futures contract, which is an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price. Futures are available on every category of commodity.

Two types of investors participate in the futures markets:

  • commercial or institutional users of the commodities
  • speculators

Advantages invest in commodities:

  • It’s a pure play on the underlying commodity.
  • Leverage allows for big profits if you are on the right side of the trade.
  • Minimum-deposit accounts control full-size contracts that you would normally not be able to afford.
  • You can go long or short easily.

Disadvantages invest in commodities:

  • The futures markets can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
  • Leverage magnifies both gains and losses.
  • A trade can go against you quickly and you could lose your initial deposit (and more) before you are able to close your position.

Why investing in commodities:

 💡 A Safe Refuge during Crisis

Often investors do not feel confident about investing in commodities but think about precious metals like silver, gold, and platinum; they offer a clear protection during inflation and times of economic uncertainty. They are a good source of investment even during tough times.

💡 Diversified Investment Portfolio

An ideal asset allocation plan means having a diversified portfolio. Commodities are an important component of having a diversified investment portfolio. If you are already investing in stocks and bonds, it is suggested that you consider investing in raw materials simultaneously. This way, whenever there is a stock market crash, you are not putting all your eggs in a single basket.

💡 Transparency in the Process

Trading in commodity futures is a transparent process. The course of action leads you to fair price discovery which is controlled by large-scale participation. Such a huge participation also reflects different perspectives and outlook of a wider section of people who are dealing with that commodity.

💡 Profitable Returns

Commodities are riskier form of investments with huge swings in prices. Companies either hit it right on a resource discovery or experience heavy losses. This opens up opportunities for you to make profits in the commodity market provided you plan your investments right.

💡 Hedging

Whenever the rupee becomes less valuable, you need more money to buy commodity goods from different parts of the world. Especially during inflation, the prices of commodity goods go up as other investors sell off their stocks and bonds to invest in commodities. Therefore, you can be benefit from some commodities in your portfolio that act as a potential hedge against risks.

💡 Protection against Inflation

When the economy is dipping, money is worth less – inflation occurs. The prices for commodities usually go up during high inflation; accordingly the price of raw materials also sees an upward trend. Therefore, a few commodities in your portfolio will help you benefit from this upswing.

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