Introduction
Including commodity derivatives not only diversifies your portfolio but also reduces risks incurred with direct investments. Among multiple attractive commodity investment options, copper futures stand out as a prime example. It is a highly sophisticated trading methodology and traders need to manage their positions actively.
As a trader, you need to undertake detailed research about copper futures before making a final decision. Let's dive deep into the world of copper futures and how can they be a valuable addition to your investment portfolio.
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What are copper futures?
Copper futures enables traders to buy or sell copper at a predetermined future date. With leverage, traders can maximise their investment potential with copper futures. Moreover, since traders decide whether to take physical delivery or roll the contract to the next month, active position management is very essential.
How do copper futures work?
Copper can be traded on MCX, where buyers and sellers speculate on future prices. Copper futures have minimal margin requirements, which enables larger trades. However, the risk factor also increases significantly with higher leverage being available.
On expiry, the buyer either chooses physical delivery or rolls to the next month. Speculators find copper futures as a great investment opportunity. They can predict price movements, take short or long positions, and can settle contracts in cash.
Moreover, copper consumers lock in buying prices with long positions, while producers fix selling prices with short positions to hedge against market volatility.
What are the factors affecting copper futures prices?
Copper futures prices are influenced by various factors. As a vital component in the manufacturing sector, demand for copper aligns with industrial activity worldwide. However, since the second half of 2022, the mounting recession concerns have put downward pressure on copper prices. Let’s take a look at other factors influencing the price of copper futures.
Government Policies
International trading policy updates by the Indian Government, such as tax adjustments, quotas, and penalties, can greatly influence the availability of materials, including copper. These changes potentially impact the value of copper, which leads to price fluctuations in the market.
US Dollar Value
Copper’s global valuation is denominated in US dollars, with an inverse relationship to the currency. When the USD depreciates, copper prices tend to rise, while a stronger dollar leads to lower copper prices.
In India, a weaker USD means lower costs for investors to acquire copper, driving up demand and subsequently increasing its value. Simultaneously, a stronger USD requires more expenditure to purchase copper, resulting in reduced demand and a decline in market prices. Understanding this currency relationship is crucial for analysing copper futures and making informed trading decisions.
Commodity-Specific Events
Copper prices can be influenced by specific events related to the commodity. Factors like the discovery of new mines, building renovations, and construction of factories can boost demand and drive up prices.
Conversely, the closure of production facilities, strikes, supply disruptions, and natural disasters can affect the supplies, leading to a decline in the market value. Monitoring these events is essential for understanding and predicting copper futures price movements.
What are the benefits of investing in copper futures?
Trading copper futures provides the following benefits:
- Copper is widely used in multiple industries. As a result, its demand is expected to grow steadily, leading to an increase in prices of copper futures.
- Copper futures are highly liquid. You can purchase or sell them easily, as per your requirements.
What are the limitations of investing in copper futures?
Besides several advantages, trading copper futures also comes with significant risks:
- Supply disruptions from national or international events can significantly influence copper’s value.
- Due to copper price volatility, investing in larger shares can result in substantial losses if the market does not align with your expectations.
Conclusion
With global infrastructure growth, the demand for copper is set to increase steadily which can offer good returns on investment in copper futures. But before investing in copper, perform technical analysis to identify market trends. This analysis will help make informed predictions on future price movements, thereby offering better chances of making profits.
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