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Understanding Commodities Market and Choosing the Right Commodity Broker

Kotak Commodities | 26 Jul, 2013  | Follow Author | Add to my Favourites 
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Commodities derivatives offer an excellent alternative for those looking to diversify beyond conventional investment avenues such as bonds, stocks, real estate, etc.  In current times, there is no need to take physical delivery of stocks. One can participate in trading by just paying a certain percentage of the entire contract value and get started. They are dedicated exchanges which have been set up exclusively for trading of commodities.

There are various commodities that get traded on the exchanges, some of them include gold, silver, platinum, nickel, aluminum, crude oil, natural gas, gasoline, copper, coffee, cocoa, sugar; etc. Some of the most common terminologies that are used in trading are as follows:

- Long : Going long on a commodity means that a trader anticipates that the price of a commodity will go up

- Short : Going short on a commodity means that a trader anticipates that the price of a commodity will go down

Commodity trading can take place with the below mentioned objectives:

- Hedging

This technique in the commodity market is used by a lot of traders to hedge their risk. For example, a rice trader may want to hedge the risk in the fluctuation of rice around the time that the crop is ready for harvesting. Hence, he locks-in to a pre determined price by selling his crop forward. Hedging does not necessarily bring gains. It can result in losses also. What it does is that it makes the outcome more certain.

- Arbitrage

If the price of the same asset is the same in two different markets, a person will purchase that asset from the market where it is available at a lesser cost and sell the same at a higher cost in another market. This is called as arbitrage. 

- Speculation

Commodity trading can take place for sheer speculation purposes. If a trader is bullish on a particular commodity, then he will buy futures of that commodity and hope to make a gain on the same. Similarly, if he is bearish on a commodity, then he will sell futures to make a gain on that trade.

A very common question for starters is how to trade in commodities? To answer this, there are various types of orders which can be placed once you have the basic understanding of the market. They are as follows:

a) Limit Order: It is an order of the type where the user specifies the price at which he/she wants to trade

b) Day Order: An order that is available for execution during the current trading session until executed or cancelled. As the name suggests, all day orders get cancelled at the end of the day

c) Market Order: It is an order that should be executed at the prevailing current market price once the order is submitted. If the market is not functional at that time, then last traded price is taken and the order remains in the system

d) Stop Loss Order: It is a tool that minimizes losses. This is an order that gets executed only when the market price crosses the trigger price of that commodity.

In order to get started with trading in commodities, one needs to get his/her commodity trading account in place. This is the first and one of the most important activities in the process of getting started. There are several brokers in the market who have the membership of reputed commodity exchanges like NCDEX and MCX. A complete list of brokers can also be got from the respective exchanges. As far as the exchanges are concerned, they are regulated by the Forward Markets Commission (FMC). The brokers are not liable to be registered with the regulatory authority.

You should do a thorough background check of the broker, quality of services offered and most importantly, the brokerage that is charged. Chances are, you may find other brokers in the market that offer their services at a relatively cheaper rate, but their quality of services may not necessarily be good. It is recommended that you also understand details about their online trading platforms. It should be user friendly and be able to give you a comprehensive view and analysis of the commodities you trade in.

Once you have made the choice of a broker, you need to sign the account opening forms which have a lot of detail. Since an investment in commodities is a risky proposition for both parties, there may be an agreement that may have to be signed by you and arbitration may be used to resolve a future dispute. You are also required to pay a minimum margin amount to the broker to get started. Your commodities demat account can be linked to your bank account and hence, the transfer of money can take place smoothly. As far as the minimum investment is concerned, a person can get started with approximately Rs6,000. This amount also varies with the type of commodity you choose to trade in. On expiry, the position is squared off in cash and settlement of trade takes place.

About Kotak Commodities

Kotak Commodities is promoted by the Kotak family that has decades of experience in commodity trading, they have a full-fledged research division involved in macro & commodity complex research and commodity specific research. This is combined with a strong and well networked sales force, which helps deliver current and up-to-date market information and news. For more information visit their website.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.