So first of all the question arises - What are commodities? In economics, a Commodity is a marketable item produced to satisfy wants or needs. In other words commodity is a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.
Now the next question - What are Commodity Markets? So the answer is any place where all raw or primary products are exchanged is called commodity market. Commodity markets can include direct physical trading and derivatives trading in the form of spot prices, forwards, futures and options. Commodity Futures are contracts to buy/sell specific quantity of a particular commodity at a future date on an exchange platform. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.
Where are they being traded?
Major Commodities are traded on the exchange New York Mercantile Exchange (NYMEX) Crude Oil, Heating Oil on the Chicago Board of Trade (CBOT) Soy Oil, Soy Beans, Corn London Metals Exchange (LME) Aluminum, Copper, Tin, Lead, Zinc, Nickel Chicago Board Option Exchange (CBOE) Options on Energy, Interest rate Tokyo Commodity Exchange (TCE) Silver, Gold, Crude oil, Rubber Malaysian Derivatives Exchange (MDEX) Rubber, Soy Oil, Crude Palm Oil Commodities Exchange (COMEX) Gold, Silver, Platinum, Copper Multi Commodity Exchange (MCX) Gold, Silver, Crude Oil, Menthe, CPO, Copper, Zinc, Lead, Nickel etc. National Commodity & Derivative Exchange (NCDEX) Chana, Soybean, Soy Oil, RM Seed, Pepper, Jeera, Turmeric, Chili, Sugar etc.
Why Commodity Trading?
Commodity trading can be done for various purposes, the two most important are:
· To cover exposure towards physical trades for risk management (Hedging)
· Having no exposure in physical form - Investment & Speculation
Hedging is the practice, offsetting the price risk inherent in any cash market position by taking an opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities. Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good, such as a financial instrument commodity
Basic instruction (How to trade)
The basic information that a trader requires to make a trading decision are:
· Selection process of the commodity depends on the knowledge and interest of the client regarding the various commodities. It also depends on the amount of margin required/used. Margin is the amount the client is interested to invest in commodity market. The selection of the commodity also depends on the time horizon (short, medium and long) of the trading strategy, risk appetite and investment objective, the client has set for his investment in commodities.
· The choice of commodities is also based on the purpose for which customer want to go for investment like hedging, speculation or diversification.
· Margin amount has to be deposited by both buyers and sellers of futures contracts. The purpose of collecting margin money by the exchange is to avoid the counter party risk of defaulting by its members or their clients in fulfilling their obligations. It is a part of the risk management system.
In order to trade the client can contact the broker/dealer to get the available price and details regarding the margin amount required for executing the trade.
For information on a particular commodity one has to generate interest in reading the fundamental reports coming out from the research desk. The profit and loss of a trade depends on how correct you can identify the future trend of the price movement of that particular commodity. The loss can be controlled by putting a stop loss whenever you trade.
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