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Commodity Trading-Mutual Funds

Commodity Trading-Mutual Funds

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Published by api-3832523
The truth is that commodity trading is as risky as you want to make it.
The truth is that commodity trading is as risky as you want to make it.

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Published by: api-3832523 on Oct 18, 2008
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05/09/2014

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Commodity Trading
By Alex Weis
Date added: June 1st, 2002
Main article:http ://www.teen anal yst. com/adv anced /co mmodities.ht ml

I should begin this article by disclosing the fact that I have never traded commodity
futures and my acquaintance with this topic is through research. Most investors are
familiar with stocks, bonds, and mutual funds as forms of investment. Too often
commodity trading is ignored even though it has many advantages over other types of
investments.

The principal attraction of commodity trading is its potential for large profits in a
short period of time. In spite of that, because most people lose money, commodity
trading has gained the reputation of being too risky for the individual investor. The
truth is that commodity trading is as risky as you want to make it. If you act prudently
by doing your research and having someone with more experience aide you, then your
prospects should be good.

Unlike other kinds of investments, such as stocks and bonds, when you trade
commodity futures, you do not truly buy or own anything. You are merely speculating
on the direction of the price of a certain commodity. If you believed that the price of
wheat was going to rise, you would buy future contracts. Conversely, if you thought
the price of wheat was going to drop then you would sell future contracts.

In addition to buying futures on products like wheat and corn, one can buy futures in
currency and market indices. An advantage of trading futures on market indices is that
you have to invest a lot less money than you would if you were buying stocks. For
instance, a $10,000 futures contract on the S&P 500 is equivalent to about $350,000
dollars in stock. Let's say you are expecting the stock market will go up in the short
term, you could buy many of the stocks that compose the S&P 500 stock index (the
route most people take) or you could buy an S&P futures contract . If you invested
$350,000 in stocks in the S&P 500 on the first trading day of September 1996 and held
the investment for two weeks you would have made a profit of $20,000. If you,
instead, bought a $10,000 futures contract on the same time period you would have
made the same $20,000, a two hundred percent gain.

The downside is that commodity trading is usually done on margin to leverage your
investment so a small downward swing in the price could cost you your entire
investment. For this reason one must be discreet and make informed decisions.
Commodity futures trading is not a replacement for other forms of investment, it
simply offers another way of obtaining diversification in one's portfolio.

How commodity trading works
Sulagna Chakravarty | January 19, 2006
Answer these questions.

Do you think gold prices will go up further?
Are you sure that crude oil prices are going to fall?
Have you heard that the soya crop this year is bad and will result in soya prices going up?
If you believe that these predictions have a good chance of coming true and are willing to bet

some money on them, you could try your hand at playing the commodity futures market.
In How to trade in Futures, we spoke about stock futures. Here we talk about commodity futures.
The commodity markets have changed a lot from the poky, little hole-in-the-wall trading offices in
narrow streets next to crowded markets where traditionaldhoti-clad merchants used to trade.
Brand new commodities exchanges---the main ones areNC DEX andMCX---have been set up
and these are fully computerised.

More and more stock brokers are setting up commodity brokerages as well, and trading volumes in commodity futures is widely predicted to rival the volume of derivative transactions (futures and options) on the stock exchanges.

What's more, you can also trade online.
Why commodities trading?
Well, let's suppose you want to buy gold because you believe that the price of gold will rise.
You could then buy gold ingots, store them, wait for them to go up in price, and then sell them at a
profit.
But, you have to be sure that the gold you buy is pure, you have to find a place to store it, you
have to provide the security, transport it to vault and other such hassles.
A far better way to invest in gold would be to buy gold futures from the commodities exchange.
How do you do that?
When you buy a Gold Futures contract, you undertake to do three things.

1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month, two months, three months

and so on. Of course, if you sell the Gold Futures contract before it expires, then you don't have

to worry about actually buying the gold.
Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm.
Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm.
You can sell the Gold Futures any time before expiry of the contract.

Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the
same way in which stock prices or stock futures prices are quoted on a daily basis in the stock
markets.

How it works
Just like stock futures (Read How to trade in Futures to understand how futures work).
When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the
cost. This is known as the margin.
Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is
100 gms. 100 gms of gold may be worth Rs 72,000.
The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520.
The low margin means that you can buy futures representing a large amount of gold by paying
only a fraction of the price.

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