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5 Things to Keep in Mind Before Starting Commodity Trading

ICICI Securities 16 Mar 2022

 

  • Commodities can be volatile as they are cyclical in nature and depend on demand and supply cycles
  • Unprecedented situations like wars, pandemics an natural disasters can impact the prices of certain commodities
  • Commodity trading is not the same as stock trading. There are different sets of risks and even a different trading account
  • The trading hours for commodities are longer than stock market trading hours, which investors can use to their advantage
  • It is important to keep an eye on liquidity so that you to get stuck. Adequate research is also a must before investing

Commodities such as gold and silver have been serving as a store of value for ages and are doing so even now. For instance, as the news of Russia-Ukraine war broke out, commodities such as crude oil, edible oil, wheat, nickel, among other commodities, saw their prices jump.

It is also important to note that commodity trading is one of the oldest mediums of trade. Thanks to technology, commodity trading can be done smoothly now. All you need is open a trading account with a trustworthy broker. Here are few things that you should keep in mind before you start trading in commodity.

Commodity Trading Is Different From Stock Trading

The first thing that you need to do is to unlearn things that are common to stock trading as commodity trading is different from equity trading. This is important because what influence commodity prices may not affect equity and vice-versa.

The prices of commodities are influenced more by demand and supply. So, there could be certain events that may not affect your equity prices but impact commodity prices badly. For instance, floods may not impact equity but can affect the prices of commodities, especially agri-commodities.

Commodities Are Highly Volatile In Nature

Like any other investment product, commodity trading also entails certain risks. The economic principle of demand and supply is what drives the prices of commodities in the market. Some of these risks are unique to the commodities market, while some are common with other asset class markets.

Commodity trading can sometimes be very volatile and, hence, you have to monitor your position every time very closely, especially during special situations like a pandemic, war, etc.

Commodities Are Cyclical In Nature

Commodity prices move in cyclical trends derived from the universal economic principles of demand and supply, economic factors and the existing geopolitical scenario. As a commodity trader, you should spot the opportunity according to the commodity cycle.

You should also keep an eye on any unprecedented situations. Unprecedented situations can open up opportunities or cause heavy losses to you. For example, nobody knew that neon gas prices would skyrocket after the Russia-Ukraine war started; this happened as two companies from Ukraine stopped production. These two companies accounted for 50 per cent of the world’s neon gas supplies.

Commodities Trade For Longer Hours

The commodity market is open from 9 am till 11.55 pm. The timing is intentionally long, so that the commodity prices can be matched with international prices prevailing in the European and US markets. Therefore, you need to spare longer hours to get the best deal out of commodity trading.

However, you can use the longer trading hours to your advantage. Since most people are unable to do any trading during office hours, they can easily utilize post-office hours.

Select The Right Exchange And Broker

Liquidity plays an important role in any trade. Select an exchange where there is ample liquidity. This will mitigate the constant worry of finding buyers and sellers. Since the commodity market is open for a longer duration, there may be times when there are fewer market participants and vice-versa. In such cases, there is the risk of untimely settlement since most investors would be needing to square off the position before expiry. There need to be enough buyers on either side of the trade or you would be stuck with specific commodity contracts.

In India, MCX is the biggest exchange and is known for non-agri commodities; NCDEX for agri-commodities.

Moreover, gaining knowledge and doing research on commodities is important before you jump into trading, so open your commodity trading account with a broker which has a trading platform and provides research support as well.

Disclaimer – ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) 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. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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