Things You Must Know Before Investing In Commodities Futures

Trading in commodities futures requires some basic understanding about the concept and how to deal with its fluctuating prices which are affected by the global supply and demand. For a better portfolio diversification, some amount can be invested in commodities futures which can earn good returns over your investments. Due to massive economic reforms in India, scope for commodity crude oil and its trading has much to offer its investors. It works same like an equity market but still there are some basic differences which you must be aware of. Governed and regulated by Securities exchange board of India SEBI, the commodity trading deals in several food, energy and metal use futures contracts. Let’s take a look on some important aspects to gain an insight before investing in them. ‘

How they work?

Dealing in futures contracts is like an agreement in which you agree to sell or purchase a particular commodity at a fixed price for a certain time period. Now if the price of that underlying commodity goes up, you can buy it on agreed price at the time of entering in contract and can sell them at a higher rate which is prevailing now. In the opposite condition, where the price falls, investors may face loss.

How to Invest?

You can trade commodities via Exchange Treaded Funds ETFs and Exchange Traded Notes ETNs which are generally dealt on National Stock Exchange. Your commodities may include, commodity online crude oil, gas, coal, iron-ore, gold and silver. Depending on your knowledge about these commodities and your budget, you can buy ETFs by creating a Demat account. Every commodity has its own specified margin which are calculated on the value of commodity contracts. You have to deposit this margin in trading account before getting started with your trading. You can then start tracking the fluctuating prices of your commodities on a daily basis.

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Risk Factors

One of the major concern while dealing in commodities is its volatility as the crude oil commodity price tend to fluctuate at a greater level. This is why in the beginning, it was suggested to get a good understanding on what factors affect these fluctuations. Mostly, the change in price of commodities is affected by change in currencies, especially the U.S. Dollar factor and various economic activities across the globe, especially in the U.S and China.

Apart from this, the overall functioning of companies producing these commodities, climatic, economic and political changes also affect the prices in a significant way. To avoid risks, it is better to diversify your portfolio into various commodity categories as volatility never remains the same for all categories and this gives you a chance to cover up your losses from other one.

Developing A Strategy

You will hear from many people that trading commodities is same as gambling. Up to some extent, it might be true but there are possible ways to deal effectively with them. The most experienced investors form proper trading strategies and make huge profits on their investments. This requires a good understanding about the global market, planning and prioritizing your investments in different commodities.

Anticipating the global market trends, keeping yourself updated and spending enough time to evaluate your policies will make sure that you earn good returns irrespective of market conditions. The best way is to deal in ETFs which is also preferred by most of the commodity investors and the rest depends on your planning and strategically diversifying your investment portfolio.