Commodity Trading – Advantages & Disadvantages

Commodity futures markets enable industrial producers and industrial shoppers to offset the chance of antagonistic future value actions within the commodities which embody mcx gold suggestions, silver suggestions and that they’re promoting or shopping for.

Benefits of commodity buying and selling

Leverage: Commodity futures function on margin, that means that to take a place solely a fraction of the overall worth must be obtainable in money within the buying and selling account.

Fee Prices: It’s a lot cheaper to purchase/promote one futures contract than to purchase/promote the underlying instrument. For instance, one full measurement S&P500 contract is at present price in extra off $250,000 and may very well be purchased/bought for as little as $20. The expense of shopping for/promoting $250,000 may very well be $2,500+.

Liquidity: The involvement of speculators signifies that futures contracts are moderately liquid. Nevertheless, how liquid will depend on the precise contract being traded. Electronically traded contracts, such because the e-minis are typically essentially the most liquid whereas the pit traded commodities like corn, orange juice and so forth will not be so available to the retail dealer and are dearer to commerce by way of fee and unfold.

Potential to go brief: Futures contracts may be bought as simply as they’re purchased enabling a speculator to revenue from falling markets in addition to rising ones. There isn’t a uptick rule for instance like there’s with shares.

No Time Decay: Choices endure from time decay as a result of the nearer they arrive to expiry the much less time there’s for the choice to return into the cash. Commodity futures don’t endure from this as they aren’t anticipating a selected strike value at expiry.

Disadvantages of commodity buying and selling

Leverage: Generally is a double edged sword. Low margin necessities can encourage poor cash administration, resulting in extreme danger taking. Not solely are income enhanced however so are losses!

Velocity of buying and selling: Historically commodities are pit traded and so as to commerce a speculator would want to contact a dealer by phone to position the order who then transmits that order to the pit to be executed. As soon as the commerce is stuffed the pit dealer informs the dealer who then then informs his consumer. This may take some take and the chance of slippage occurring may be excessive. On-line futures buying and selling, NCDEX may also help to cut back this time by offering the consumer with a direct hyperlink to an digital alternate.