Commodities are actual, tangible products or goods which can be physically stored. Gold, cosmetics, books etc. are some of the examples for commodities. Investing in them with a commodity trading company is called commodity trading. Many investors make quick money from it by putting in any minimal capital they wish to invest.
1. Risk involvement
Some experts suggest that commodity trading is not for regular investors. It is risky to some extent but if you are careful and can control your greed, it can be safe enough and work for you like any other investment option. You need to determine your risk appetite and not directly aim for high returns in order to lower the risk.
2. The Process
In commodity trading, you do not actually own any commodity. The process is is to bet on the future price of a particular product depending on global and domestic demand-supply situation, weather, output etc. If you think that price of a product will rise in future, you can buy it now and sell when the price is high. When you think the price is going to go down then you may sell it. You would find buyers and sellers operating in the market any time. Non-fulfillment of the obligation results in the delivery of the commodity. While this is the process for futures trading, there is also spot market trading in the commodities market. Spot market trading involves farmers, traders etc. and results in the immediate delivery of goods in case of sales and purchases.
3. Types of players in this market
All those involved in a total commodity circle are called Commercials. This includes the basic producer, the developer and the merchants.
When a group of people pull together their investment to increasing the chance of good returns and cut back possible losses, they are called Large Speculators.
The most common players are Small Speculators. They are the individuals who invest through a broker or have their own commodity account.
4. Starting commodity trading
The first thing that you need for commodity trading is the knowledge of facts that affect commodities. All commodities have different reasons for their rise and fall. For eg., a crop which requires more rain will see its price rise in case of a drought as its supply may be affected adversely thereby making its supply scarce, but a crop which needs less rain will see its prices fall as the climate would favour its output, thus increasing its supply. You also need to be aware of the techniques of investing in this sector to get the best results. You need to ensure that you have a clear idea of a commodity and then sell or buy according to the expected market price and situation. You can invest through a commodity brokerage or operate a personal commodity trading account.