While most investors are fully familiar with stock trading, such as stocks or mutual funds, or bonds such as investment bonds, commodity trading often overlooks the fact that it has many advantages over other types of investment vehicles. Let us first define what is the commodity ' is the first. Goods can come in many forms. The most common traded items include lean hog, live cattle, oats, wheat, metal and even currency.
One of the attractions of trading commodities is the potential to generate large profits in a relatively short period of time. Despite this, commodity trading is considered by most people to be extremely risky, as most investors tend to lose money. However, by performing due diligence and determining whether the item you are interested in is undervalued or overvalued, you may be able to minimize the risks involved in commodity trading if you want to be long-term or short-term. It may also be helpful to provide you with an experienced commodity dealer.
When you trade in commodity futures, unlike other types of investments [such as stocks or bonds], you don't really buy or own anything. You are just guessing where the price of a particular item will go. If after the study you think the price of coffee will rise, you will buy a future contract or buy it for a long time. On the other hand, if you think the price of sugar will fall, you will sell a futures contract or short.
As mentioned earlier, in addition to buying or selling futures such as cattle and pigs, you can also buy futures in currency or market prices. One of the benefits of trading futures on a market index is that you don't need to invest a lot of money, rather than investing a lot of money when buying stocks. Let us explain in the following way that Nasdaq's $10,000 futures contract is equivalent to about $200,000 in stock. Let us assume that you expect the market to rise quickly, you may buy many stocks that make up the Nasdaq Stock Index [herd mentality], or you can buy Nasdaq futures contracts. Suppose you invest $200,000 in the Nasdaq market, and if the index goes up, you might make a profit of $25,000. However, if you buy a $10,000 futures contract at the same time instead of investing $200,000, you will first earn the same $25,000 by investing less.
One disadvantage of commodity trading is that it is usually carried out on margin to capitalize on your investment, so a small price drop may increase your overall investment cost. It is for this reason that he/she must conduct due diligence and decide whether he/she will give a particular futures contract as a prudent investment. While commodity trading can be interesting, although not risk-free, it provides investors with another way to diversify their portfolios.
Orignal From: Introduction to commodity trading
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