The commodity market is a vast market where different types of commodities like rice, grain, metals, and oil are traded. Their fluctuating prices present opportunities for traders to carry out the purchase and sale of commodities with the expectation of reaping profits.
As with any other investments, there are some prerequisites for commodity trading online. Knowing these things will ensure that you do not face any surprises. So, here are five things you should know before trading in commodities!
1. It is Open for Longer Hours
Unlike share markets, commodity markets are open for longer hours, which means trading takes place beyond the usual trading hours, i.e., 09:00 hours to 23:30 hours.
This extension is introduced so that these commodities can be on par with global markets and international prices prevailing in the US and European Markets. Trading beyond usual hours provides you with the flexibility to choose your trading timings for commodity trading online.
2. You Need to Monitor Margin Requirements
Before trading in commodities, you need to deposit a certain amount of margin. This margin amount is based on the margin contract value, and this percentage varies from commodity to commodity.
Exchanges sometimes also impose additional margins on investors. Therefore, ensure you enquire regarding the required margin and be ready before you begin trading.
3. Square Positions Before Expiry
Squaring off refers to selling your commodity position, whether it makes a profit or a loss the same day.
You can hold two types of market positions: open and closed. When a trade has an open position, you can still obtain profits and losses; when it is fulfilled, the trade has a closed position.
Most traders do not carry the intent of availing physical commodities when trading on a commodity trading app. This is why as a trader, you should square positions before the contract expires.
4. Commodity Prices Are Cyclical in Nature
Commodity prices are cyclical in nature because these trends are derived from economic factors such as demand and supply, geopolitical scenarios, etc.
For instance, when the supply of commodities diminishes, there is a rise in the prices which encourages suppliers to take advantage of this and increase the supply of commodities.
As a commodity trader, you need to perceive and spot the best opportunity in this cyclical trend to maximise profits.
5. They Are Highly Volatile
Commodity prices usually tend to fluctuate regularly due to various reasons. While commodities are also influenced by demand and supply, like other stocks, additional factors contribute to their high volatility.
Commodities are significantly influenced by natural calamities like floods, so ensure you always keep an eye on them! This is why it is important to time and closely observe your position in this market on your commodity trading app.
Conclusion
Commodities offer many benefits, such as protection against inflation and flexible trading schedules. They do not have any direct correlation to assets like bonds and stocks. Hence, these commodities help you diversify your portfolio.
Additionally, your risk also gets dispersed since there it is not compulsory for commodity markets to decline at the same time as stock markets.
You need to remember that commodity trading online differs from trading stocks; hence the factors affecting their prices will also vary. Keep these five pointers in mind and do your homework before you start trading in commodities.
