Commodity Trading: Online Commodity Trading: How Commodity Trading Works?

There has been a good enough reason why people are now looking forward to Commodity Trading.

Advantages of Commodity Trading:
Firstly, many investors have burnt their fingers in the recent turmoil in the stock markets across the globe. Hence, such people are now looking for alternative investments and Commodity Trading is one such option available to them.
Secondly, a Commodity is a real asset. Its not a virtual asset like stock or bond. A Commodity is produced, while a stock exists virtually. So people can make better interpretations of the Commodity Trading trends, by looking at weather reports, geographical circumstances, etc. Compare that to a company stock valuation, everything is hidden. Nobody knows what is going on within the company and whether the financial results disclosed are correct or not. Hence, there is better understanding on Commodity Trading.
Thirdly, Commodity Trading helps in hedging against unexpected price movements for the actual producer or the Commodity, like a farmer. He can lock in the profits much before the produce is available and can be shielded away from the various pricce movements in future.

What has been the historical performance of Commodity Trading and Commodity Mutual Funds?
We have done a study of best performing mutual funds in the article Best Performing Commodities Mutual Funds. It has been observed that Top 3 best performing stocks mutual fund over the past 1 year were actually the commodities funds.

What are the pre-requisites for Commodity Trading?
You must select what you want to trade on. Commodity trading is available for anything and everthing - Crude Oil, Gold, Silver, Potato, Soya, Pork, Beans, Oranges and almost every single thing that can be classified as a Commodity.
So if you believe that Gold prices are going to fall, you can short sell a Gold Commodity Future. If you believe that Crude Price is going to go up, then you can buy a Crude Oil Future. If you are an expert in crop production analysis or weather analysis, and you believe that Soya Crop is going to take a hit this year, then you can short sell Soya Futures. Or if you feel that a deadly flu can cause the pork industry to take a setback because it will affect lots of pigs, then you may short sell Pork futures.

How can you do Commodity Trading?
Today, the world is running over internet and mobile devices. For Commodity Trading, the simplest way is to open an Online Commodity Trading account with a Commodity Broker and all the orders can be placed at the click of a button. Do remember to check the quality of service and feedback about the broker.

Why should someone trade in Commodity
Commodity Trading allows you to benefit from price changes, without actually having to buy that Commodity. For e.g. if you believe gold prices are going to go up, then you can buy gold bars. However, you will need sufficient money to buy Gold Bars. Then you will have to worry about the safe storage of the gold bars which may further cost you. Third, you will have to rely upon your goldsmith to trust the quality of gold.

Compare that to Commodity Trading. You dont need full amount of money to buy the Gold, as you can trade on margin (a percentage of actual price). Then, you dont have to worry about storage as the Gold future contract is stored in your demat account. And third, you dont have to worry about the quality of gold, as that is implicitly covered in the Gold commodity futures contract.

What are the risks in Commodity Trading?
MTM Losses: The biggest risk in Commodity Trading is the MTM losses or the Mark to market Losses. Suppose that you buy a crude oil future which is going to expire after 3 months time and your agreed price is $50. However, say after 15 days of you buying the crude future, the price starts to drop and reaches the level of $35. You will then have to pay the difference and it has to be done on a daily basis, which is called mark to market.
If the price drops significantly, then you will end up paying money on a daily basis for MTM losses, so one should be careful about that.

Related: Crude Oil Price: Can you bet on Crude Oil Futures NOW? & Best Performing Commodities Mutual Funds

What are the other ways of Trading in Commodities?
Instead of being an active trader, you can also passively trade in commodities. There are hundreds of Commodity based mutual funds which allow you to take a bet on commodities without being an active trader. Few of them are listed in the article link provided above.

Gold Investments? Gold price rising again: Consider Gold ETF

Nothing comes for free in this world. Just after Fed declared a 75 basis points rate cut, the worries for higher inflation were automatically in.
Bernanke also included a formal warning about inflation and the effect is seen immediately.

After waiting for 3 days, the Gold prices have jumped for the first time in last 3 days. Even the other precious metal – silver – went upwards.

As per the commodity analysts, the Gold prices will continue to rise further. Oil prices are already on the high and a weak dollar, which forces gold prices upwards. In the recent development where Fed has gone for rate cut as many as 6 times, the gold is expected to continue its bull run.

People with limited savings may not be able to purchase the gold for investments, hence they are advised to opt for Gold ETF’s or Gold Exchange traded funds.

Gold for immediate delivery, which had dropped 2 percent yesterday, rose as much as 0.6 percent to $988.55 an ounce, which is 4.3 percent below the all-time high $1,032.70 set March 17. It traded at $987.66 at 10:55 a.m. in Tokyo. Silver for immediate delivery gained 0.3 percent to $19.78 an ounce.

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Commodity Trading Tax: CTT to be reversed?

It was easy for the finance minister to levy a commodity trading tax or commodity transaction tax. However, it will be tough times for the commodities markets.

The bread and butter of the commodities traders is the Arbitrage Trading, with which they earn their living. After the proposal of commodity trading tax or CTT, majority of their earnings will go into the tax payment.

Hence, along with the market makers, traders of the commodities markets, even the regulators have started to lobby around for elimination of this CTT proposal. Commodities market regulator Forward Markets Commission (FMC) has taken up cudgels on behalf of commodity exchanges to exempt futures trading from the proposed commodities transaction tax.
As per the news, The tax will kick in soon after the Finance Bill is enacted and will see a 0.017% levy on option premium and the sales price of a commodity derivative. While the seller will have to shell out the payment in both cases, the purchaser will be required to pay 0.125% on the settlement price of options in commodity derivative or an option in goods.


The tax is expected to hit day traders, who account for nearly three-quarters of the trading volume of around Rs 40 lakh crore.

FMC is learnt to have countered by saying that it was wrong to compare the commodities and the equities markets since both had a different character. Besides, commodities, it said, was not an asset class for investment.

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