In every Indian’s life, commodities play a significant role. A commodity is a fundamental good (and could be called a raw material) that is used in commerce, interchangeable with another good of the same kind. Conventional examples of commodities include gold, grains, oil, meat, and natural gas.
From a retail investment point of view, except for gold, commodities may not be held in their physical forms. However, commodity trading by investors offers up an effective way to diversify investors’ portfolios, over and above the traditional securities that most invest in. As the prices of commodities are prone to moving in an opposite direction compared to stocks and shares, investors tend to rely on commodity investment in times of market volatility. Previously, the commodities markets required substantial money, time and expertise. They were limited to only expert traders. However, the picture is quite different now, and there are a variety of options to participate and make returns in commodities investing.
Before you understand how commodity traders make money off the commodity markets, and before you open a commodity account to do so, there are some key points about the markets to note:
The main thing to do before you start to trade seriously is to have a solid understanding about commodity markets and transactions. As you would do research before you invest in equity shares or any upcoming IPO to make your investment potentially successful, you would do the same for commodity trading to be potentially fruitful. The only way to make sure your commodity account has the best investments that can make you money is to know how you should transact with commodities and which to trade in. The key step to making money is to gain some knowledge first.
The primary way that traders make money in the commodity market is by trading in commodity futures contracts. For individual traders, commodity futures present an easier way to trade and earn, without losing much initially. Traders and investors can own an asset without taking full control. A futures contract in commodities trading permits traders to have an agreement to purchase or sell a specific commodity (the underlying asset of the contract) at a particular price on a predetermined date in the future.
The way that a futures contract works is plain to understand: when the prices of commodities rise, buyers in a futures contract get a corresponding rise in the contract’s value. A seller will suffer a loss correspondingly. If the price of the futures contract decreases, the futures’ contract seller profits and the buyer makes a loss.
In much the same way that you buy equity stocks of any company, you can buy commodity company stocks as well. Equities of a commodity are easy to trade in , and you can sell your stocks for a profit when the commodity price rises, when the commodity produced by the company is in demand. Besides the convenience of commodity trading in commodity equities, you will find that volatility in the markets affects commodity equities less than futures contracts.
In order for investors to ensure more returns, they may invest in a company that has a global foothold, like BHP, for instance. The company has a presence in 25 or so countries and with a commodity account with equities from this company, you may ensure substantial returns. The company deals with oil, coal, iron ore, copper and natural gas to name a few commodities, and there’s a greater chance of any of these offering up profits, even at the cost of others.
ETFs or exchange traded funds trade as stocks do, allowing traders and investors to gain exposure to commodities. Commodity ETFs can target just one commodity or track the performance of several different commodities on an index. This provides a wider and more diversified scope to earn returns as different commodities are traded. Investors may also seek a commodity index that trades in the same commodity sector, but tracks a range of commodity companies of a specific sector.
Several ways to earn money in commodities markets exist. Once you know the ways to invest, it all depends on how the markets and investors behave. Investors who indulge in commodity trading and purchase commodities and hold them (take long positions) like stocks, stand to earn more in a rising price scenario. In the commodities markets, the buying and selling of commodities takes place on the basis of a range of factors and demand and supply are considered the most important. Commodity traders operate on very low margins and trade with the least risk possible. The majority do not wish to trade with futures contracts, but would rather seek out profits on a daily basis, or hold direct commodity stocks for the long haul.
Commodity trading can bring you profits if you are knowledgeable about the aspects that drive commodity prices. If you open a demat account today, and expect that commodity prices will give you returns tomorrow, you may be wrong. However, holding on to stocks for a long duration may bring you large gains in the future. The same is true for any other assets you invest in, like equities or any other upcoming IPO, for example.