4 Misconceptions You Must Avoid While Trading In The Commodity Market

1. 4 Misconceptions you must avoid while trading in the commodity market The commodity futures trading market has successfully completed more than a decade in India. However, investors still seem to be hesitant when it comes to commodity futures investing. This is all the more true for retail investors who are reluctant to participate in the commodities market due to a few preconceived notions about the same. But these are unfortunately nothing but myths. In fact, in the coming months, the liquidity of the commodity derivatives market is like to see a tremendous boom owing to the fact that the Securities and Exchange Board of India (SEBI) has now allowed mutual funds (MF) and portfolio managers to invest in commodity derivatives. The truth is, people can and do actually make money trading commodities. If you look around, you’ll definitely see a number of successful traders in this field- from NRI investments to even private and amateur ones who are constantly analyzing the commodities market and generating excess income. So, if you want to get in on the same bandwagon, then take a look at some of the misconceptions about the commodities futures investing market: 1.Many people speculate that there is a general lack of information regarding how to invest in options and futures. They also feel the same for the commodities and their price movements. However, this is not true. The price movements of the said commodities is affected by a number of factors like global economic cues, currency market dynamics, demand- supply conditions and much more. When we consider popular commodities like silver, crude oil and gold, it becomes all the more possible to access information regarding the different players that decide its price movements. Nowadays, there is no lack of information regarding any financial subject- even if you are making NRI investments. From news websites to TV channels, you can stay up-to-date with information if you only take the initiative. However, if you are not sure, you may also take assistance from brokers who might provide their own helpful insights about the market updates, thereby lending you a hand in making judicious investments in the commodity market.

2. 2.Many investors are of the view that after commodity futures investing, they have to actually receive the delivery of physical commodities. However, as an individual investor, this is not something that you need to concern yourself with. It is only the commercial players who are involved in making and taking the deliveries. As long as you remember to close your futures contract before the first notice day, you will have nothing to worry about deliveries. In case you forget about the initial notice day, you can rely on your broker to remind you of it! 3.Investors consider volatility to be one of the biggest hindrances in commodity futures investing. In reality though, commodities are no more unpredictable than stocks. In fact, unlike stocks, which have the possibility of moving around 20%, metals and energy contracts can move up or down to a maximum of 6% in a single session. What’s more, when we consider agricultural commodities, the limit stops at4% only! Admittedly, precious metals and base metals get heavily influenced by the world economy. But the extended period that is offered for trading in these commodities provides plenty of opportunities for lucrative ventures. The real problem- be it domestic or NRI investments- which gets commodity traders in trouble is that fact that they overtrade. In order to conduct a successful trade, you should know how to invest in options and futures derivatives. In this context, one should not exceed more than half the number of contracts than the maximum margin requirements. This will make sure that even if prices move down a little, you won’t end up wiping out your entire investment amount. 4.Lastly,most people still think that you need to set aside a ton of money to trade commodities. While that may have been partially true a long time ago, it no longer remains a valid fact. The minimum investment amount has further been lowered in the recent years to encourage more participation in the form of domestic and NRI investments. Most of the commodity futures today require investors to invest around 4-5% of the total value of the plan- maximum around 10%. Additionally, the launch of several mini contracts for popular commodities has eased down the barrier even further.

3. Trading in the commodity futures market is definitely not an easy task. It takes a lot of practice and skills before one can acquire the necessary expertise. However, if you are convinced of the realities of the commodity trading market, and have the required confidence and capital to test this market, then you can gradually build a strong portfolio and achieve your financial goals in the long run.