Apprehending the Concept of Online Commodity Trading

By now we all know that trading in commodity is an activity that involves buying and selling or trading and investing in commodities. Unlike stock trading, where a trader buys and sells the stocks, trading in commodities is the one where buying and selling of commodities takes place on major commodity exchanges like MCX and NCDEX. Commodity Trading too is affecting by the demand and supply. Thus, when the supply of a commodity is limited its price increases, while an excess supply results in the fall in prices. Therefore, the commodity trading process is directly or indirectly affected by the demand and supply of commodities.

Commodities are traded either on a spot level or as future contracts. A futures contract is an agreement wherein two parties agree to buy and sell an asset at a certain future time in the future at a certain price. Thus, in commodity future contract, the underlying asset happens to be a commodity.

ADVANTAGES OF ONLINE COMMODITY TRADING

Online commodity trading just like online stock trading comes in with a bunch of advantages which make the entire process of trading easy, fast, and convenient for the investors and traders. Here are some of the advantages offered by it:

• Trading Convenience: Online commodity trading allows easy and convenient trading experience to both traders and investors. High-end, integrated trading platforms offered by various commodity brokers allow fast, efficient and reliable trade execution. All these trading platforms virtually offer you everything once you login to your trading account. Investors have access to various resources like charts, quotes, future news, research and even online trading assistance.

Despite being a beginner trader you get access to all the research and trading facilities that will help you in executing your trades. You can take decisions related to when and what to buy and sell either by conducting your own research or by going to the market research reports shared by your commodity broker.

• Flexible Trading: Online trading happens instantaneously and offers you the freedom to trade at your convenience anytime, anywhere. This ensures that there is flexibility allowing you the freedom to watch the market and then take informed decisions and make quick trades if required.
• Less Commission Charged: All online commodity trading brokers allow quick execution of trade at lower commission charges. Thus, it makes it a lot cheaper for you to buy and sell futures contracts than buying or selling the underlying instruments.
• Increased Liquidity: One of the major benefits is higher liquidity. High level of trading activity is what characterizes liquidity. Assets that can be bought and sold easily are called liquid assets. Speculators’ involvement also means that future contracts are reasonably liquid.
• High Leverage: Commodity trading also comes with the benefits of leverage. Leverage is the use of borrowed capital or margin for increasing the potential return of investment. Traders need to pay only a small percentage of the total value of a position upfront to get the full benefit and enhance your profits.
• Investment Diversification: Returns from trading in commodities have a low or negative correlation with the returns generated from other major asset classes and hence is used majorly for portfolio diversification. Commodities react differently when compared to stocks and bonds in various economic and geographical situations, enhancing risk-adjusted returns, and reducing the overall portfolio volatility. For instance, geo-political factors like wars and natural disasters have an impact on the commodity’s supply and increase the demand for some commodities.

Final Note

Commodity trading has been there for decades. More and more traders are now shifting to online commodity trading owing to the convenience, diversification, flexibility and ease of trading it offers. However, despite the advantages online commodity trading offers, it does come with its own set of drawbacks. Some of the disadvantages of online commodity trading include the need for having a mentor, leverage which acts as a double edge sword, and over trading. All these disadvantages can be waived off if you are cautious while trading commodities.

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