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Commodity trading is nothing but trading in commodity
derivatives (futures or options). In other words, if
you are keen at taking a buy/sell position based on
the future performance of commodities like gold, silver,
agricultural commodities, metals, crude etc; then you
could do so by trading in commodity derivatives.
Commodity derivatives are traded at the commodity exchanges.
There are currently 2 major commodity exchanges NCDEX
(National Commodity and Derivative Exchange) and MCX
(Multi-Commodity Exchange). Gold, Silver, Agri-commodities
including grains, pulses, spices, oils and oilseeds,
mentha oil, metals and crude are some of the commodities
that the exchanges deal in.
- No counter party risks.
- Higher Leverage: Get high exposures for the margin
provided.
- Prices are pegged to international markets of NYMEX,
CBOT, CME, LME etc.,
- Portfolio diversification: An investor can now
diversify his portfolio by investing in commodities
markets.
- Arbitrage opportunities: Take the advantage of
price spreads, calendar spreads and Inter exchange
spreads.
To Producer: Producer of a commodity
can hedge against the price fluctuations by selling
the futures contracts of the commodity, thereby locking
in a desired price to sell produce. It would insulate
producer from adverse market movements as losses
in spot market would be offset by profits in the
futures market. Thus, risk gets reduced by paying
a small amount as brokerage.
To Investors: Investors always look
for alternative investment avenues where they can diversify
their funds to achieve their financial goals. In financial
markets, commodity futures have rapidly emerged as
a major investment tool as they help in diversifying
investments and to hedge against inflation, greatest
threat to any investor.
Commodities as an investment option also offer following
advantages to an investor:
- High degree of leverage.
- Higher reward compared to stocks and other financial
instruments.
- Better chance of intraday day trades than other
financial instruments.
- Presence of the international commodities like
gold, silver, crude oil, aluminum, steel etc. which
can be
tracked based
on the international market movements as well
To Commodity Trader: A trader can
use commodities futures to ensure protection against
any adverse change in the prices. A trader can enter
into a futures contract for purchase of a certain quantity
of the underlying at a particular price on a particular
date, or enter into a futures contract for sale of
a particular quantity on a particular date at a particular
price and be assured of the margins because both purchase
price as well as the sale price are fixed reducing
the uncertainty and hence the risk associated.
To Exporter: Futures trading is very
useful to the exporters as it provides an advance indication
of the prices likely to prevail and thereby help the
exporter in quoting a realistic price and thereby secure
export contract in a competitive market. Having entered
into an export contract, it enables exporters to hedge
their risk by operating in futures market.
List of traded commodity
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