Commodity trading is a type of trading that focuses on investing in physical products such as gold and oil. Commodity trading is quite similar to stock trading. The only difference is that in commodity trading, assets such as gold and oil are traded as opposed to selling companies shares as it is usually the case with stock trading. Commodity traders usually deal with raw materials that are used in the beginning of production process such as grains used in production of animal feed or copper used in construction industry. The main objective of a commodity trader is to secure the best price for the producer while at the same time ensuring that they supply quality products to consumer at a competitive price. The profit margin that a trader usually get is quite slim when compared to other industries. That means that volume of transactions made plays a huge role in determining the overall success a trader.
Risks and benefits of commodity trading online
Unlike the past where commodity trading was purely and off-line business, nowadays, more and more brokers are allowing their clients to trade commodities online. Thanks to advance in technology, brokers are using advance trading tools to give real time updates that are accurate to their clients. They also give real time reports. However, just like any other industry, investing in commodity trading online has its own risks and benefit. In this section, we are going to discuss both the benefits and risk of investing in commodity trading online to help you make an informed decision.
Benefits of investing in commodity trading online
1. High growth
Over the last decade, the demand for commodities has significantly increased. This has also lead to drastic increase in prices. The high growth that the commodity trading market is currently experiencing has provided good opportunity for traders to make good income within a short period of time.
2. Access to information
Commodity trading online is fast becoming more and more popular because traders now have access to well researched information to help them make good judgment when investing in commodities. Some of the tools that traders are currently accessing include live market quotes, analytical charts, live reports on commodities among many others. This has helped them make informed decision when investing in different commodities. As a result, they have managed to lower risks involved in trading and increase profit margin.
3. Security against inflation
Any stock trader will tell you that inflation is a bad thing because it lowers their bond and stock investment profit. However, that is not the case with commodity trading. In time of inflation, commodity traders usually smile all the way to the bank. This is because when the price of goods and services rise, the value of commodities used to produce those goods and services as rise. As a result, commodities traders rip big when there is upswing in the market.
4. Higher returns
There is no doubt that investing in commodities involve huge risk because of price fluctuation. High price fluctuation means that you get to make huge profits or losses. If you understand the market well and make the right decision at the right time, then you make huge profits.
Risk involved in commodity trading
Just like any other form of investment, there are some risks involved when investing commodity trading online as discussed below.
1. Price fluctuation risk
This is a common risk involved in commodity trading online. Most investors are not able to predict future prices of commodities. This is because price fluctuation depend on several factors which include political instability, weather conditions among many others. In addition to that, sudden fall in exchange rate of a particular currency can result to huge financial loss to the trader. Price of commodities are usually based on demand and supply. It is therefore very difficult to accurately predict how the price will move in future.
2. Speculative risk
When investing in commodities, traders are usually exposed to speculative risks. This is because traders are not 100% certain on whether they will make profits or losses from their investments. Commodities with high volatility have higher speculative risk because any slight change can result to huge profits or losses.
3. Geological risks
The fact is that natural resources can only be found in certain parts of the world. This means that traders that are working with companies that are extracting this natural resources have deal with the risk involved in working with government. To gain access to these resources, there are many conditions that must be met including tax obligation, licensing, working with indigenous employees, environmental concerns among many others. All these important factors can be changed depending on political decision made. As a result, commodity traders need to monitor political climate on regular basis to see if it is favorable to them.
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