Why Commodity Futures is for Smart Investors?

Highly speculative stocks are traded by experts and HNIs who have money and will power to absorb huge losses in shorter period. If you don’t mind losing ₹ 50,000 in 5 minutes, you are one of them, you may enjoy trading commodity futures contracts. There’s an old proverb among futures stock traders: It’s easy to make small money in commodities. Just start with a large amount!

Commodity futures is definitely not a trading for people who are afraid of losing money. Persons who get emotionally stressed on losing their money. Being ignorant several average inexperienced “investors” get lured into making money while investing in the commodity markets month after month. Why is it so? Because of the probability of making higher ROIs in shorter time using the built-in leverage that is available to commodity futures traders.

How Commodity futures prices change?

The commodity markets include oil, gold, silver, heating oil, lumber, currency, wheat, corn, soybeans and numerous other common trade items. Large companies that operate in these markets use commodity “futures” contracts to lock in their selling prices for the product in advance of delivery. This practice is called “hedging.” On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of a wheat contract worth ₹ 5,000 may only require ₹ 500 of actual cash, or 10% of the face value of the contract. If the wheat goes up in value, and the contract becomes worth, say, ₹ 5,500, the speculator has made ₹ 500 on his or her original ₹ 500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that ₹ 5,000 worth of stock requires a minimum of ₹ 2,500 of capital. If the stock goes up to ₹ 5,500 in value, the ₹ 500 gain is against ₹ 2,500 invested, for a return of “only” 20%. The 100% return sure looks a lot better, right?

Now you have understood why even average investors make beeline to invest in risky commodity positions. That is how novice investors in search of quick gains are spellbound by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in two ways; high risk more profit or high risk more loss. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let’s say the ₹ 5,000 contract drops to ₹ 4,000 in value instead of increasing. You’ve not only lost the original ₹ 500 you put into the contract, but an additional ₹ 500. You can go broke quickly this way. So +100% easily turns into -100% in some minutes.

It is highly recommended to rely on established stock broker tips and invest conservatively in commodity futures, making it part of your investment portfolio. Average investors should make commodity futures as low as 10% of overall investment portfolio, gradually gaining experience and profits should pave way for more exposure in terms of share trading investment.
Here, you can download online share trading app.