Some Risks to be Aware of While Trading Commodities

1. Some Risks to be Aware of While Trading Commodities Today, when one thinks of trading, s/he most likely conceptualizes the trading of stocks and certain other common asset classes. However, ‘trading’ is a rather broad and all- encompassing term that goes way beyond just stocks, bonds and even currencies. Commodity trading is another extremely significant trading strategy that has been opted for by individuals and institutions for centuries in an effort to earn profits and facilitate a win- win situation for both the parties involved. While timing the market accurately and trading the right commodities can prove hugely profitable to traders, there are always two sides of a coin. Understanding the risks involved in such an exchange can only help facilitate a more cautious and secure trading process. So, here is a look at some of the risks involved in commodity market trading, and what an investor needs to know while stepping forth: 1.Speculative Risks At the end of the day, there is always some amount of speculation involved in every trade, albeit accompanied by logical predictions and analysis. Even in the case of commodities, one can only predict their market performances to a certain extent. Of course, thorough research and analysis of the market conditions help to tread with a certain level of awareness regarding the product’s demand-supply dynamics and consequent price fluctuations. However, fluctuations in commodity prices may also stem from various unforeseen factors, especially in the case of volatile commodities like petroleum and crude oil. To minimize the losses stemming from speculative risks, it is always better to trade the commodity only for the amount that one can afford to lose. 2.Operational Risks An exclusive risk factor one may have to consider while dealing with tangible assets is any delays or setbacks during its supply or delivery. These may range from documentation issues and unexpected delivery delays to quality defects and (in case of crops) famines due to climatic changes. While such operational risks are often inevitable when it comes to commodity futures investing and other commodity trading processes, it always helps to gather as much knowledge as possible about the end-to-end supply and delivery process of the commodity. Before trading the commodity, understand as much as possible about where and how the product is manufactured and the various stages involved in its supply, from paperwork and packaging to shipment and delivery. Knowing about these nitty gritties is in no way a preventive measure against such risks; nonetheless, it helps you understand the problem better should it arise any time during the trade.

2. 3.Political Risks This specifically applies to metals such as gold, silver and copper as well as natural resources like petroleum, coal and crude oil. In these cases, the companies responsible for the mining and extraction of these resources need to coordinate with the government bodies while carrying out these processes. As a result, a fiscal crisis or political upheaval may adversely affect the production and supply of these metals and resources. While trading these commodities, it helps to coordinate with share market brokers and experts to understand the involvement of the government in their extraction and supply. You may also try and find out about any possible shifts in the political scenario in the upcoming months. However, these are not preventive measures and can only help to minimize the losses to the best extent possible. 4.Export/Import Risks Another major risk involved in commodity market trading is that stemming from the export and import of these commodities across borders. Sometimes, the inflow and/or outflow of commodities between two or more countries may be abruptly banned due to global tensions or changes in the import/export policies of either country. These changes may cause tremors in commodity trading, leading to losses and risks. As a trader, it only helps to be cognizant about the international guidelines governing the import and export of the concerned commodity. This would help you understand any possible constraints the commodity is likely to face while being shipped across these countries. Conclusion Like every other investment and trading avenue, commodity trading also comprises certain risks and setbacks. Some of these risks may arise from rather unexpected and unpredictable situations, in which case certain remedial measures to minimize the losses would be the best bet. In any case, it always helps to generally understand the functioning of the equity market and the commodity trading process. Simultaneously, a study of the specific commodity, its demand and supply predictions and consequent price fluctuations also plays a major role in understanding and alleviating the risks involved. We would be more than happy to help you achieve new pinnacles in commodity trading.