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What Is Commodities Trading?

By Finserv MARKETS - Aug 24,2019
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Overview On Commodities Trading

A commodity market is a physical or virtual marketplace where buying, trading, and selling of raw or primary products are conducted. These primary products can range from agricultural goods, metals and even petroleum. Commodities are divided into two categories, namely hard and soft commodities. While hard commodities include natural resources which have to be mined or extracted such as gold or oil, soft commodities refer to livestock and agricultural products such as potatoes, corn, and others. Commodity market prices trade on the interplay between supply and demand. A lot of trading in the commodities market features futures contracts, which obligates the holder to either buy or to sell the commodity at a predetermined rate on a future date.

While the modern trade in communities’ futures can trace its history back to 17th century Japan, India’s first brush with organized commodities trading happened with the establishment of the Bombay Cotton Trade Association in 1875. While it did flourish, it was discontinued in the mid-1960s owing to war, natural calamities and the resultant shortage of resources.

Aside from supply and demand, prices in the commodities market also depend on government policies, currency moves, geopolitical issues and economic growth. Since the market is susceptible to rallies and crashes, speculation plays a major part in commodities trading.

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India has six major commodity trading exchanges, which have helped create a thriving commodities market. These include the Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX), Ace Derivatives Exchange (ACE) and the Universal Commodity Exchange (UCX).

There are several risks as well as benefits of trading in futures, which are the most common contract used for trading in the commodities market. Futures give huge profits if used carefully while trading, and you can set either long-term or short-term targets while trading in the futures market, which itself is very liquid. Futures themselves are highly leveraged instruments and you can buy them with affordable minimum-deposit accounts and controlled full-size contracts.

However, future markets are very volatile and can be a huge risk for novice investors, who may not fully understand how the market operates. Due to them being highly leveraged instruments, gains and losses on futures contracts are magnified. It is ideal to start out in the commodities market with a low amount of investment and grow it as you go along.

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There are different kinds of investors, all of whom have different trading preferences and are subject to different kinds of benefits and risks. Institutional investors are the insurers, pension funds, and other companies that invest other people’s money in the commodities or share markets. Since they often move large blocks of shares at the same time, they exert a tremendous amount of influence on the market. They are often able to negotiate better fees on their investments since they are dealing in larger volumes than an average individual investor, also known as a retail investor.

Retail investors are those individuals who invest in financial markets through a trader, broker, bank or other means. Since they are trading with their own money, they are likely to trade in lesser volumes as compared to institutional investors; and thus end up paying higher handling fees while investing, especially because of the middle-man involved in the transaction. Retail investors sometimes do gain access to “institutional-class” share classes of a fund which have smaller expense ratios since they do not incorporate sales charges.

Owing to the high risks posed by trading in the commodities market, it is advisable to maintain a diverse portfolio that includes other kinds of funds that provide less volatility. Not just stability, high ulip returns is another reason why you should consider investing in such a plan. Finserv MARKETS, offer this security at very low rates, making them among the best ULIP plans in India.

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