Online commodities trading has came out in a big way after their launch about 10 years back. It is used by commodities traders, fmcg companies, investors and speculators as tool for hedging, arbitrage and speculation. Commodity trading is an activity which involves trading in commodities like bullion, base metals and agro products etc. Commodities traded are often contract to buy/sell specified quantity of goods with certain quality parameters at specified place. Prices are affected by several factors like supply and demand situation, change in duty structure, changes in contract specifications, etc.
Although, online commodities trading also facilitates delivery settlement however major volumes are happening on with cash settlement in futures contract. (A futures contract is where two parties enter into an agreement to buy/ sell any particular asset with specified quantity at specified time in future at a certain price. Where such underlying asset is a commodity then such contract is termed as commodity future contract).
A commodities exchange is a place or a platform where above explained commodity futures contracts are traded. Taking a look on any commodity futures exchange platform, you will find various commodities listed as tradable contracts. Though, there are 24 commodity exchanges in India however there are three national level commodity exchanges. These are as follows
1. Multi Commodity Exchange of India Ltd
2. National Commodity and Derivative Exchange
3. National Multi Commodity Exchange of India.
All these are permitted to trade in all commodities.
Online Commodity Trading
Trading commodities online is becoming more and more popular in recent years with volumes crossing all time highs. Online commodity trading platform offers easier, faster and much convenient trading environment in a wide list of trading scrips. Now a days, various features which are required to trade online in commodities are available in trading software like latest commodity news, tick by tick trading charts along with tools required technical analysis. As such, Online commodity trading enables a true sense of independence while trading. This enables a trader to keep control of his trades and make better trading decisions.
Advantages of online commodity trading
Convenience: Online commodity trading platform offers easier, faster and much convenient trading in wide list of scrips. It provides high-end integrated trading applications for fast, efficient and reliable execution of trades with host of trading tools or resources like news, live quotes, research, technical charts, online assistance. If you are not sure on your trading skills in commodities, you may also access to research reports published by various brokers and agencies.
Flexibility: Online trading provides you a flexibility and freedom to trade at your free will from anywhere, anytime. As such you may track market or make trades even on the move. You don’t have to wait for or depend on anyone other than yourself for your trading.
Lower commissions: Not only faster execution of your trades, online trading comes at a lower costs. It is provided at a deep discount as compared to dealer assisted trading by almost all brokers thus reducing the break even point for your trades.
Liquidity: With more and more people from various locations getting aggregated at a single platform, a major liquidity is generated. The large number of traders putting their huge sums of orders on a single platform creates a deep pool of liquidity. It helps in easy and fast buying of selling of assets or contracts.
Leverage: With online commodity trading, you may take a large exposure by paying a small margins. As such a trader may take larger exposure leveraging on his lesser capital. This leverage reduces the cost of funds for a commodity market participant thus increasing the rate of return or the hedging costs. The amount termed as margin need to be deposited upfront on the exchange for taking any exposure.
Diversification: With low or negative correlation of returns with other other major asset classes, its well accepted as a diversifier of a portfolio. The prices of the Commodities are unrelated or moves in different directions from that of stocks and bonds.
In the events like wars, natural disasters (floods, hurricanes, droughts) leading to supply bottlenecks or the sudden increase in demand, adding commodities in a portfolio may act as a hedge.
Though there are benefits of online commodities trading however a trader should be careful about the following to avoid financial losses. There are some hidden risks that many novice traders generally ignore or do not understand as such make huge losses as soon as they start trading commodities online.
Require a mentor: With this lack of guidance, it is only natural to expect that many traders will be getting into trading losses with lesser knowledge of contract specifications or factors which affect the demand/supply of a commodity. Generally in online commodity trading, if you don’t have someone to guide you with your initial trades, their are strong chances that you may burn your fingers. Going with a professional broker and experienced dealer helps you as such you may discuss trading strategies and related risks. An advice of a mentor is important to improve your trading proficiency and reducing the loss possibilities.
Leverage: Commodity futures operate on margin, which means that to take a position only a specified percentage of contract value needs to be deposited in cash or collaterals in trading account. High leverage means higher risk attached to your capital.
Over trading: Traders should be highly cautious to the issue of over trading. A disciplined approach is required to avoid loosing money. Generally, traders have a tendency to deviate from their original thought trading strategy. Getting bored of long term position holding and looking for fast action, let trader switching to day trading.
In other words, without discipline, online commodity trading can drill a big hole in your pocket. A well disciplined trader with a sound trading plan is a perfect recipe for making profits in online commodity trading.
Different types of orders that can be placed
Limit order: It is an order where the user specifies the price at (or better than) which the trade should be executed.
Market order: It is an order which should be executed at whatever be the prevailing price on or after submission of such order. If there is no market at that point of time, it takes the last traded price and remains in the system.
Day order: It is an order which is available for execution during the current trading session until executed or cancelled. All day orders will get cancelled at the end of the day during which such orders were submitted.
Stop loss order: When a stoploss order is placed, it remains in the system in suspended. It is visible to the other market participants only when the trigger price is hit in the market. It is a useful tool to limit the loss.