Shattering the myth behind commodity trading

The commodity market has emerged as an exciting asset class providing opportunities for investors to diversify their investments. Many investors are, however, reluctant to trade commodities due to a variety of myths or misconceptions by general public.

Commodity trading increases speculation

Though portrayed by physical traders as a can of worms, commodity trading serves the economic objective of making the field agriculture liberalized by reducing government invention/government dependence to a large extent.
Commodity exchange provides a platform where traders and investors from various parts of the country can participate in the price discovery of any listed commodity. As in the case of all financial markets, commodity price is also a function of demand, supply and market sentiments. The future, markets provide estimates of the demand/supply situation of a particular commodity in the near future. This information is very important for policy makers as it enables them to take appropriate action so that the demand – supply gap can be filled in time.

Too Much Volatility

Many investors consider volatility as the biggest problem when investing in commodities. Normally, one has to put up about 4-10% of the total value of a commodity future contract in margin; that is far less then the required amount of margin for stock futures. Also, many new commodity traders don’t know the way to handle the new-found gift of incredible leverage. In reality, commodities are no more volatile then stocks as an asset class if we remove the leverage factor.
The problem with many investors is that they tend to overtrade. They might buy the maximum number of futures contracts that they can buy from their money as margin therefore, if the price moves up a little in value, they even end up doubling their investment but if the commodities move down a little in value, their investment wiped out. To be successful, one should not trade more than what the margin requirements allow. This removes the extreme leverage factor that gets so many new commodity traders in trouble.

Delivery of Commodity

This is something that gives nightmares to many investors but you really don’t need to worry about it. Only the commercial players are involved in taking and making delivery on commodities. If you close your futures contract before the first delivery notice day, which usually occurs a five- six days before the contract expires, you should have a absolutely no worries about this. If for some reason you forget about the first notice day, your broker will certainly monitor it and contact you, preventing you from entering delivery process.

Not Enough Money

You do not need fortunes to enter commodity trading; it can be started with a bare minimum amount of Rs. 1000 also from which you can trade in gold guinea(8gram gold coin).this money should be risk capital as commodities can be risky investment. The problem with account of this size is that investors take on too much risk for their account size. They tend to roll the dice and bet it all on one trade. Don’t fall into that trap. If you are looking for a respectable return of 25% a year, you will do much better in the long run as opposed to trying to hit a home run.

Nobody Makes Money

The fact is that many people do lose when trading commodities. However, the losers are usually ill prepared investors who jump into the commodity market and lose within six month, never to return again. Other gets addicted to the markets, while trying again and again to make a killing with the same strategies and just keep losing.
So, who makes all the money? It is normally the professional commodity traders and money managers that consistently make money year after year. Also, disciplined commodity traders learn how to trade commodities properly and they follow a strict trading discipline, which most losing traders never adopt.
Even you can make money from trading commodities whether you are a novice or very experienced investor. I will not say it is easy, but if you do your research and use a good trading strategy with sound money management skills, you stand a much better chance of success.