Commodities
serve as the best option for those who wish to expand their portfolios beyond
equity, bonds and real estates. Not only because the primary principles of
supply and demand are easy to understand but also as the pricing in
commodities future has been less unpredictable as compared to bonds and equity.
Hence it offers an efficient alternative for portfolios diversification.
However retail investors should thoroughly inspect the advantages and mitigate
risks in commodities before taking a leap.
Commodities
future in financial trading is involved with exchange and trading of various
raw products and goods. It may include foods, fuel, livestock as well as
industrial and precious metals. Usually the commodities that we sell or buy are
not realistic in commodity trading, it is referred as future trading.
With
commodity trading you bet on the future price of the commodity. For instance,
consider the following questions: Are you sure the gold prices will rise? Or do
you think crude oil prices will fall?
If
you are confident that there is a fair chance of the prediction to come true
and are ready to bet some money on it, that is when commodity trading enters.
This is similar to when you trade stock or cash that is purchased or sold in
standardized contracts.
To
understand the concept let’s take the following case:
Lets
suppose you enter into an agreement to buy a commodity at $76 after three days. If
the price of the commodity reaches $75 on the decided day, you can buy the
commodity lower than the actual value. However if it falls to $74, the contract
is of no value.
To
trade in commodity futures various commodity exchange options are available, like
CME group, NYSE EuroNext etc. and requires minimum investments.
As
compared to stock market, commodity trading is much faster as an investor can
make good money if good research and good instincts are involved. hence today’s
commodity trading market has become a major financial market attracting
farmers, bond dealers as well as grain merchants, savings and loans
associations and individual spectators which is evident from the fact that
trading volume in future contractors in U.S. markets has increased to about 500
million contracts per year.
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However
rewards and risks always come hand in hand. Hence, a lot can be lost just as
fast with a worthless contract. So the traders should be well informed and at
ease with the risks involved.
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