5 things to remember when you trade in commodities

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5 things to remember when you trade in commodities
You can buy and sell commodities like food items, metals, energy and more through MCX in India. Here are a few things to remember while trading in commodities.

Highly leveraged

You tend to be over-leveraged in commodities, because you pay a miniscule sum of the total contract value, which could range from 2-5%. This means that your exposure is rather large and hence your chances of gaining or losing could be more.

More risky than equities

Commodities trading largely involve a futures contracts, which has to be squared off before the contract expires.

Therefore, there is no scope for taking delivery like shares and holding it for life.

No dividend, bonus, rights issue like equities

Unlike equities, commodities offer no dividends, bonus etc. It's a pure profit or loss pay on the contract.

Commodities generally track international prices

Most of the commodities track international prices and move in tandem, especially gold and crude oil. Therefore, one must be able to largely predict international events before taking a position. For example, if one was able to predict quantitative easing by the Federal Reserve one could have predicted the bullish outlook for gold. Similarly, if one can see an increased level of tensions between Israel and Iran, one can buy crude futures, which will surely rally.

Avoid greed, while trading in commodities

It's better to take profits, if you have made them and gain peace of mind, rather than look for abnormal profits. This is simply because we live in uncertain times and you may wake up to rude shock the next morning.


Read more about: commodities
Story first published: Wednesday, November 14, 2012, 10:20 [IST]
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