Commodity Trading- An Introduction

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Commodity trading is the newest form of financial trading. The procedures are similar to that of cash trading or stock trading. Under commodity trading a person is buying and selling physical goods or raw products. The main commodities exchanged under commodity trading are precious metals like gold and silver, industrial metals like iron and aluminum, livestock, fuels and various food items processed or raw. Even vegetables like onion and garlic are traded in commodity markets nowadays in Asia.

There are two divisions of commodity trading. One is trading of primary products. This includes buying and selling of a particular item directly on the spot so, it is called as spot trading. The other one is trading of the derivative products. The derivative products are also known as commodities futures. In this type of trading a contract is made to buy or sell a commodity in particular amounts at pre- fixed rate at a particular time. By buying futures contract a trader is expecting to sell it at a higher rate after some time.

Commodity trading is considered to be a risky trading as day to day happenings will affect the commodity market. The trader has to follow the price movements in the market every day and make a trade when he thinks that it will fetch him profit. The important commodity trading exchanges are the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange.

The commodity trading is completely dependent on demand and supply. Traders make an analysis of the factors that may affect the future price of a product and decides on trading at time that he thinks as favorable to make money. In other words it is a gambling. Some times your calculations may go wrong because of the factors which are not expected and which are not under your control .like bad weather, starting of a war etc. at that time the trader may not get a better profit as he has expected or may lose his money.
There are many brokerage firms that facilitates buying and selling of commodities for you. The traders are expected to pay a commission to the commodity brokers for doing the trade for him. A broker should do the market study and advice his clients in investing the money on a particular product. This is very helpful for novice traders in deciding what is best for him. The brokerage firms may charge up to 50 % of the stock’s value as their brokerage fees.

Commodity trading is considered to be faster than the stock markets in making money. Commodity trading doesn’t demand huge investment. One can start with lower amount if he desires so. If an investor has proper knowledge, trading guidance and a good trading instinct the he can make real money in commodity trading. But an investor should be careful not to make any unscrupulous contract this may result in huge loss of money. It is easy to make money in commodity trading and is easier to loose money if a wrong decision is made.