Understand Commodities before Trading

Before starting an investment in any of the financial markets, you are required to understand various aspects of the investments such as the product, risk associated with it, reward you are going to get, service provider as well as pros and cons of investment. In this article, we are sharing successful commodity trading tips for beginners. 

The first step in commodity trading is knowing about the commodity you are going to invest in terms of nature of the product, price driving factors, contract specification, risk-reward, expiry date etc. In the following paragraphs, you are going to Know Your Commodity. 

Whether you realise it or not, commodities are an important element of human civilization. From the food we eat to the fuel that powers our modern modes of transportation, commodities are what make the world go round. Commodities are not only consumed but may also be invested in as well. That’s why banks, hedge funds, institutional investors, businesses and even nation-states trade in commodities each day. Let us understand in detail the different commodity types we use in our daily life.

Different Commodity Types

Metals

In commodities trading, metals are of two types: precious and base. Precious metals are shiny metals that are valued for their rarity and high economic value. The most common examples of precious metals are gold, silver, and platinum. Precious metals are considered “safe haven” assets for their ability to retain value during times of market turbulence and uncertainty. When there is fear, investors park their money into gold and silver.

A base metal, on the other hand, tends to corrode relatively easily, which makes it more useful in commercial and industrial applications. Base metals are more abundant than precious metals and are therefore cheaper. The most common base metals include aluminium, copper, lead, zinc, tin and nickel.

Additional Read: How to trade in commodity?

Energy

The energy commodities include products like crude oil, natural gas, and gasoline. As you can imagine, energy commodities play a huge role in the global economy because nations rely heavily on these and other fossil fuels to keep their economies running. Oil prices are influenced by such things as production, the supply-demand balance and even politics. The price of oil also influences other financial markets ranging from stocks to currencies.,

Agriculture

Agriculture is a massive global industry that feeds billions of people. Soybeans, corn, wheat, coffee, cocoa, cotton, and sugar are all available on the global exchanges, giving investors an exposure to diverse commodities within agri classification.. Factors that affect prices of agricultural commodities are supply,demand, population growth, extreme weather, droughts, and other forces.. In India, agri commodities available for trading are soybeans, soybean oil, rapeseed mustard seed, cotton, chana, crude palm oil, turmeric, jeera, dhaniya, mentha oil etc. 

Understand Commodities Before Investing

The commodity derivatives price movement happens based on various factors such as supply and demand, GDP, inflation, interest rate, growth in manufacturing and services sector, international trade as well as movement in the stock market, bond market and currency market. Following are the some of commodity selection criteria for beginners, 

High Volume: Commodity selection is heavily influenced by volume. A commodity's volume indicates how many investors and dealers are selling or purchasing that commodity on a given day. Commodities with a larger volume are usually the ones that have the potential to give good gains to traders and investors, because high volume will indirectly enhance volatility, resulting in a variety of opportunities for intraday traders to book profits.

Selecting Popular Commodities: The commodity market has a wide range of commodities from numerous categories. Base metals, precious metals, energy, and agriculture are the four main groups. Crude oil, silver, gold, natural gas, zinc, soybeans, and other commodities are among the most popular in the market. 

Avoid Unpredictable Commodities: Commodity trading, as previously stated, necessitates a great deal of information and expertise because you may make an approximate projection on a commodity's future movement based on your market knowledge and experience. Any commodity that had a bullish run for a few weeks before crashing could  be a lousy choice.. A trade in such commodities could provide high returns, but the risks could also be higher. Therefore, it may  not a sensible option to use them for your trading.

Risk Profile Analysis: This is the most critical factor to consider before selecting the ideal commodity for your transaction, and it is generally overlooked by most traders. When you trade in the market, you're always taking certain risks with your money. An understanding of  risk profile may help you determine how much risk you could assume in the market. If you have a low risk profile, you should avoid commodities with a high-risk reward ratio. Trading in high risk reward commodities could be an excellent way for traders with a high risk profile analysis to profit from risky market moves. Entering the market without a current risk profile can jeopardise your financial stability. As a first and main step before joining the commodity market for trading, it is recommended that you assess t your risk profile...

Full broker support

Selection of broker is very essential to have a smooth trading experience. It is advised to select a broker that  is having PAN India presence, state-of-the art technology for seamless trading experience, strong risk management and operations division as well as a dedicated research desk to advise the customers on commodity trading. Research is one of the most crucial criteria for trading in any section of the financial markets, including stocks, bonds, and commodities. It is critical to thoroughly investigate any commodity before deciding on it for your trading. A review of the charts, demand and supply chains, and economic news may  aid you in selecting the best commodity for your trade. You may  take an  advice of research analyst to assist you in making better trading decisions.

Additional Read: How MFs Add Value to Commodity Trading?

Do's and Don'ts in Commodities Trading

Investment in any of the financial instruments carry risks such as market risk, price risk, geopolitical risks etc. Hence, it is utmost important to take calculated risks while making investment decisions. Here are some of the do’s and don'ts in the commodity derivatives market. 

Do’s

• Trade only through registered brokers.
• Assess  on your risk-bearing ability
• Familiarize yourself with guidelines and rules, regulations, byelaws, circulars, etc. 
• Take an informed decision
• Understand the Delivery and Settlement Procedure.
• Understand and Comply with Taxation and other relevant laws.
• Pay all applicable margins. Collect/pay mark-to-market margins daily.
• Insist on documentation with the member such as Member Client agreement and Know Your Client.
• Read and understand the Risk Disclosure Document.
• Insist on signed Contract Notes containing all relevant information such as Member Registration Number, Order Details, Trade Rate, Quantity, etc.
• Insist on a periodical statement of your ledger account.

Don’ts

• Don't get misled by rumours, luring advertisements and promises, and bull/bear run of market sentiments.
• Don't trade any contract without knowing the associated risks.
• Don't undertake off-market transactions.
• Don't accept/pay cash.
• Don't sign blank Delivery Instruction Slips.  
• Don't delay payment/deliveries to Members.

Disclaimer: - ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code:-07730), MCX (Member code: 56250) BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.