Why commodity trading can be an smart asset class for retail investors
Indian financial investors and traders have for the most part stayed focused on trading share markets, while world over commodity markets are greater than equities. One cause is the relative ease in identifying with commodities when contrasted with shares. Indeed, even an Indian house wife tracks gold costs firmly, independent of the way that she would be purchasing the shinning metal someday. So also, a farmer follows cotton and sugar costs in the market consistently however infrequently make utilization of it for hedging his produce.
Despite the low penetration, development of commodity markets has been amazing. Given the solid trending nature of commodities it bodes well for traders and retail investors to take a look at an alternate asset class, particularly since share markets are getting warmed up in all markets. In India, trading commodity bodes well for different stakeholders as almost 58% of industry is specifically or in a roundabout way identified with commodities, aside from the farming segment.
Commodities can be joined with equity and obligation to diversify one's portfolio. The great part about commodities is that they are less unstable both on a day premise and additionally long time premise. Further, its patterns are more secular; this is particularly true when one looks at the agriculture commodity segment.
For retail financial investors, trading commodities is significantly simpler as it doesn't require the detail fundamental analysis that runs with share picking. It is a case of pure supply and demand. If monsoon is great farming commodity has a tendency to go down and on the off chance that it is beneath typical their costs have a tendency to develop. In like manner, hard commodities like metals if worldwide economy is blasting, their demand and costs have a tendency to develop while if development is quelled their costs tend to drop.
In short, there is couple of factors that should be checked for following a commodity. Since commodity cycles are of longer term they lean to pattern longer when contrasted with equities. Further, since they are exceedingly liquid markets, which are interlinked internationally, it is hard to control them and makes it simple for traders to participate in it.
In India, trading is permitted through futures trade and is nearly and carefully checked by market regulator SEBI after Forward Market Commission was merged with it. Today, there are 3 commodity trades that permit trading commodities.
Here are some of the key features that can help a retail trader participate in the commodity markets.
For retail trader who needs to take an interest in the commodity markets, it is as straightforward as opening an ordinary broking account with your local share broker gave the intermediary is an individual from the commodity trades. As unpredictability is low in commodities, the margin required to exchange is additionally low. One can develop a position with a little margin of Rs 5,000.
Margin requirement is in the 5-10% run when contrasted with 30-40% in individual shares in the equity markets. Notwithstanding, low margin is a double edged sword. Because it is little numerous traders lean to take an upper exposure and a sudden move the other way can wipe out the current margin as well as result sought after for additional. In this manner, risk management has a more vital influence in commodities than it will in equities.
Different to equities there is one parameter than a trader needs to remember. In equities, the unit of a futures lot is dependably the quantity of stocks. For instance, one part of Reliance would include say 500 stocks. In any case, in the event of commodities the unit changes relying upon the commodity. It can extend from kilograms to tons to pound to bushels and barrels. The trader should know about the unit of the commodity that he is trading.
Another variable is deliveries of goods purchased. In derivatives markets, there are by and large not very many deliveries over the world, yet at the same time investors need to realize that deliveries are likely of the fundamental goods. Trades permit money and in addition delivery settlements. Deliveries are for the most part favored either by customers or producers who had hedged their position in the market.
This brings us to the subject of who are the players in the commodity market. Commodity Market principally includes hedgers, speculators and arbitrageurs. It is the last category of players who contribute the most extreme volumes in the market. As worldwide commodities are connected, it offers great opportunities for insightful players to arbitrage and estimate. There is, be that as it may, another leg of currency hedge that should be dealt with when taking arbitrage position. Arbitrageurs nowadays are ordinarily algorithmic based and pretty much rules out a retail investor to catch.
Hedgers then again are either producers or consumers who take a position in the market to bolt their price risk. In this way, if a producer of say copper feels that costs are great in the futures market, he will pitch it in the market to bolt his cost. If costs descend after he makes a position, at that point he profits by the fall in prospects cost, however he may understand less by selling in the physical goods in the cash market.
So also, if the cost expands, the hedger will lose in the futures market, however this loss will be dealt with in the cash market when he sells the great on delivery.
Speculators are another huge player in the commodity market. As specified before, the trader has a decision of taking a spot based either in light of fundamentals or if he is adept with technical analysis he can utilize. Being liquid markets, technical analysis likewise functions admirably in this market. Similar principles and techniques of technical analysis that are utilized as a part of share markets can be utilized as a part of commodities.
But, following fundamentals is far simpler as its demand supply changes are miniscule in commodity markets as they are altogether developed markets with set suppliers and consumers. Key events like monsoon in developing instance of agriculture commodities and general economy development for every other products can give a wide thought to get a view on the commodity.
Some of the greatest traders worldwide have profited in the market by trading commodities due to its tendency of being moderately less unstable. Another trader can take in the tips of the trades much preferred in the commodity market over in Share markets.
Swastika Investmart Stock Broking Company India it is aspires to make derivatives trading a simple and gainful risk for its investors.