Commodity Trading is not a modern method of trading; goods trading and exchanging has a long history. A commodity refers to the essential goods used in day to day life. Exchanging these goods with the same type is the basic concept of commodity trading. Typical examples for commodities include beef, oil, grains, gold, silver, salt, sugar, natural gas and other metals.
It is the best way for traders to diversify their holdings beyond conventional securities. The price of commodities moves in inverse proportion to stocks; value increase when stocks go down and vice-versa.
It is the reason why investors rely on commodities in the condition of the high volatile market.
Today there are various commodity markets where an investor can trade, but the situation was different in the past. At that time, trading required money, a considerable amount of time and expertise also it mainly restricted to professional traders.
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How Are Commodities Traded?
The steps for trading are as follows:
Step 1: Open commodity trading account and get approval.
For opening account, you need to decide the broker who will open commodity trading account for you.
Choice of broker plays a vital role; you can opt for HFTrading the leading brokerage service with the advance user-friendly platforms like Meta 4 trader, which will make your trading journey better. They also provide learning tutorial for beginners if asked.
Once the broker select, you can carry on with the essential paperwork with your broker by filling an application form. On proper satisfaction and document verification, broker opens the account.
Step 2: Margin Money
As soon as the account opens, the trader has to deposit an amount known as the initial margin amount. It is generally 5-10% of the contract value.
Along with the initial margin, maintenance margin has to be maintained in an account. It is security money which ensures that the trader can pay off in case he experiences a massive loss during adverse price movement.
Step 3: Order processing:
After all these formalities, a trader can start trading. For this, he can go through various technical and fundamental indicators to decide the commodity which he can invest in to gain profit.
Inform the contract value and number of lots to your broker and pay margin fee accordingly. As soon as the broker marks the order, the trader becomes the owner of order.
Step 4: Mark-To-Market Settlement:
The clearinghouse is responsible for determining the settlement price of the commodity at the end of each trading day. After comparing the settlement price and the price at which order was placed, the difference amount is calculated. This amount is either debited or credited in the trader’s account depending on loss or profit incurred.
Step 5: Termination of the contract:
There are various methods to terminate the agreement or contract. The knowledge of termination is necessary because this makes commodity trading different from other forms of trading.
Two Ways For Contract Termination Can Be:
- Giving and taking delivery of goods, but it is a rare form to terminate a contract.
- Most popular is the cash settlement, where the difference in the selling and buying parties’ expectation is settled in cash.
Hopefully, the idea of how are commodities traded? And the steps involved in commodity trading is clear now.
Types of Commodities
There are four broad branches or categories for products- energy, agricultural, livestock and meat and metal.
1. Metal
It includes precious metals like gold, silver, platinum and copper but the most famous among them is gold trading.
They are good examples for the stores of value, their value might fluctuate, but they never lose their worth in the long run. Investors invest in these metal, especially during market volatility.
2. Energy
It includes heating oil, gasoline, crude oil and natural gas.
Reduced oil outputs and global economic developments around the globe have led to the rising demand and price of these products.
3. Livestock and Meat
It includes bellies, cattle, lean hogs, feeder cattle and pork bellies.
4. Agriculture
It includes wheat, cocoa, cotton, sugar, coffee, rice and corn. Grains are volatile in the agricultural sector during the summer season or any weather transitions period. The investors who intend to make a profit from this rising price of the commodity in agriculture can invest here.
CFD Trading
CFD stands for contract for difference. It refers to the agreement between a buyer and a seller. They agree to buy or sale a particular share at the price difference of the stock at the time of closing and opening of the market. They are a derivative product which helps you to speculate on the market such as commodities, shares indices and forex eliminating the need for ownership of underlying assets.
CFD trading is a popular tool among investors because it allows traders to buy and sell a fixed number of shares in a given stock at a given time that too at a fixed price.
Advantages of CFD trading
- Higher leverage- It offers high leverages as compared to conventional trading.
- No day trading requirements- Some market set limits on the minimum amount for day trade and also limits on the number of deals in a day. CFD is not bound to such limits.
- No Borrowing stock or shortening rules- Traders can short with no borrowing cost because they do not own the underlying asset.
- Variety of trading opportunities- It offers diverse financial mediums to the trader such as sector, currency, index and many more.
- Global market access from a single platform- Wide range of markets available (about 4000).
- Professional execution with no fees.
Disadvantages of CFD trading
1) Traders pay the spread (the difference between the offer price and buy price)
2) Weak industry regulations
Bottom Line
The price of a specific commodity is driven by its supply and demand in the market; these factors determine how commodity trading will work in the market.
The process of trading seems simple and sorted, but it brings many risks along with it. The risk may include high leverages, the volatility of market, inflation and deflation.
So, traders should be well- informed about all the factors and market fundamentals before starting trade in the commodity market. They can also take help from the broker if needed.