Commodities are materials or resources that create refined goods or help in creating them. Iron, crude oil, natural gas, steel, cotton, silver, cereals, pulses, and other commodities are examples.
Commodities are actual goods that are bought, sold, and traded in markets, as opposed to securities such as stocks and bonds, which are solely financial. PLG also has blogs on commodities and what makes them valuable.
The purchasing, selling, and trading of commodities is commodity trading. Derivative contracts such as commodity futures and options are often used in India for commodities trading. The value of a commodities derivative contract, such as futures and options derives from the underlying asset, or commodity.
Commodity trading is generally in lots, such as barrels of oil, bushels of corn, kgs of wheat, and so on. The underlying commodities are raw materials or primary items such as wheat, gold, crude oil, and so on, rather than manufactured or processed products.
Things To Know Before Trading Commodities
As profitable as it is, it is really important to know and understand some things before trading commodities. This blog discusses a few of them.
Commodity Trading Setup
You will need a demat account and a trading account when you start with this. Demat accounts are similar to bank accounts in that they digitally store your goods. You’ll need to store commodities digitally in your demat account, like you keep money in your digital wallets. The trading account will allow you to freely purchase and sell these commodities to other market participants – this will normally occur through an exchange – to connect to this exchange, you will need to choose a broker that can assist you with online trading.
Understanding Commodity Markets
The first step in developing a keen mind for success in commodities trading is to study extensively about how commodity markets operate. The next step is to begin paper trading and maintain a bird’s-eye perspective of worldwide markets by reading excellent news and reports. After that, keep paper trading while continually monitoring your positions and transactions in light of current events.
Requirements To Trade Commodities
You can buy/sell commodities by just having the margin amount in your trading account, rather than paying the entire cost of the commodity futures contract. This is usually between 5% and 10% of the total contract value. For example, if a Gold (1kg lot size) contract costs Rs. 50,00,000 and the margin requirement is 10%, you get it for Rs. 500,000. Aside from that, you’ll need to keep some extra cash on hand to cover any losses (if any). This is usually between 2% and 3% of the contract’s total price.
Futures and options are contracts that provide you the right or option to purchase and sell commodities in the stock market at a later period. For example, if your options contract is active for 13 days, you can choose to buy or sell an asset within those 13 days at a preset price. A futures contract, on the other hand, does not give you a choice; if your futures contract is valid for three days, you sell or purchase the underlying commodity before the contract ends. Before you start betting on the commodities market with your own money, you’ll need to know how derivatives operate.
Tick size is something you need to know about before starting to trade commodities. Any security’s tick size is the smallest price movement. If the price of Gold, for example, swings up or down, it will at least change by the minimum tick size. The size of the tick changes depending on the lot size.
The commodities market, like the stock market, has several rewards, but only if you have the necessary information and expertise. PL Global Impex Pvt. Ltd. is a well-known brand in this industry. It makes commodity trading and investing easier for all of its clients.