You should learn how commodity trading works if you’re still new in options trading.
The commodity trading market has changed drastically and has
become more complex. It’s become very important to learn commodity trading and how commodity trading works even more important.
Today we have new fully computerized commodities exchanges: NCDEX and MCX. Growing number of stock brokers are trading in commodity brokerages and trading volumes are also increasing in such a way that it can even rival the derivative transactions volume on the stock exchanges.
Why commodity trading?
It’s an important question. Well, let’s start with an example. Suppose you purchase gold with the belief that the gold price will rise in future. And you buy gold bricks, store it, wait their price hike, and then to earn profit sell them.
But, when you buy gold, you need to ensure that you get the pure gold only. Then you needed a secure place to store it, and face the risk of theft and other hassles.
Instead, you can invest in gold with purchasing gold futures from commodities exchange without any such risks and hassles.
How to trade at commodity exchanges?
When you purchase Gold Futures contract, there are three points you need to undertake:
First, you buy the gold quantity specified in that contract. Secondly, buy gold at the specified price in the contract. Third, buy gold on the expiry of the contract. In case you sell the Gold Futures contract before its expiry date, you need not worry about buying the gold bricks in reality.
For instance, you purchase Gold Future contract at say, Rs 8,000 per 10 gm.
Your calculation proves true and gold prices shoot up to reach at Rs 9,000 per 10 gm.
You are free to sell the Gold Futures and earn handsomely at any point of time even before the contract expires.
Gold and other similar commodity futures prices on commodity exchanges are quoted in similar way at which stock futures prices are quoted in the stock exchanges.
How commodity trading works
Now let’s see how stock futures work.
When you purchase stock futures, you need not to pay the complete amount. What you pay is just a specified percentage of the entire cost, known as margin. Let’s take example of Gold Futures contract.
The minimum gold future contract size is 100 gm. 100 gm of gold will cost you Rs 80,000.
The margin amount for gold set by MCX is 3.5% only. So, at the time of purchase you pay Rs 2,800 only.
This means that you buy gold futures contract of Rs 80,000 by actually paying Rs 2,800 only.
So you purchased the Gold Futures contract when it cost Rs 80,000 per 100 gm.
Suppose, the very next day, the gold price went to Rs 82,000 per 100 gm. Rs 2,000 (Rs 82,000 minus Rs 80,000) will be credited to your account.
But the nest day, the prices dip to Rs 81,500. Rs 500 will be debited from your account (Rs 82,000 - Rs 81,500).
Though it seems very attractive and lucrative, but if you are new and don’t know how commodity trading works, before you begin trading at commodity exchange, learn commodity trading first.
Tags: commodities exchanges, futures contract, How commodity trading works, stock futures
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