The Commodity Market: A Complete Guide by Rakesh Bansal Advisory

The Commodity Market: A Complete Guide by Rakesh Bansal Advisory

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Rakesh Bansal

October 29, 20245 min read

#Commodity#Commodity Advisory#Commodity Advisory Services#Rakesh Bansal Advisory Services#Advisory Services#Rakesh Bansal

Commodity markets are the backbone of the global economy, providing a platform where raw materials such as crude oil, precious metals, and agricultural products are traded. At Rakesh Bansal Advisory, we believe that understanding the basics of the commodity market can open doors for profitable investments while managing risks smartly.


In this blog, we will break down key aspects of the commodity market, including how it works, trading processes, risk factors, margins, and expiry dates.



What Exactly is the Commodity Market?


The commodity market is where essential resources, such as metals, energy products, and agricultural items, are bought and sold. This market is divided into two main categories:


Hard Commodities: These include metals like gold, silver, copper, aluminum, and energy commodities like crude oil.


Soft Commodities: These include agricultural products such as wheat, coffee, and cotton.


In India, commodity trading primarily takes place on exchanges like the Multi Commodity Exchange (MCX), where traders speculate on future price movements through contracts. It’s a market that connects global and local trends, making it both dynamic and challenging.


How Does Trading in the Commodity Market Work?


Trading in the commodity market is straightforward but requires knowledge. Here's a simplified guide:


1. Choose a Broker: Open a trading account with a registered commodity broker who provides access to exchanges like the MCX.


2. Select the Commodity: Choose a commodity based on your research and analysis. Commodities like crude oil, gold, and aluminum often attract significant interest.


3. Analyze the Market: Before placing a trade, perform market analysis. Technical analysis tools (such as charts) and fundamental research (like supply-demand data) are essential.


4. Place Your Trade: Once you’re ready, place your trade through the trading platform provided by your broker.


5. Monitor & Exit: Keep an eye on your position, and set a stop-loss to manage risk effectively.



What are the Risks in Commodity Trading?


Trading commodities can be rewarding but is not without its risks. Prices in commodity markets are influenced by multiple factors, such as geopolitical events, currency fluctuations, and economic data. Here are some key risk factors:


Market Risk: This is the risk of sudden changes in commodity prices due to global events, such as political instability or supply chain disruptions.


Liquidity Risk: Some commodities may have fewer traders, which can make it difficult to buy or sell quickly.


Leverage Risk: Futures contracts are leveraged, meaning you control a larger position with a smaller margin. This can amplify both profits and losses, so caution is essential.


At Rakesh Bansal Advisory, we recommend setting stop-loss orders and position limits to manage risk while trading in these volatile markets.


How Much Margin is Required in Commodity Trading?


Margins in commodity trading are essential as they allow traders to leverage their positions without needing the full amount upfront. Margin requirements are set by the exchange and vary depending on the commodity and market conditions.


Initial Margin: This is the upfront margin required to enter a position. It typically ranges between 5% and 15% of the contract’s total value.


Maintenance Margin: If the market moves against your position, additional funds may be required to maintain it, known as the maintenance margin.


For example, to trade a contract worth ₹1,00,000, you may need to put up only ₹5,000 to ₹15,000 initially. However, as this also increases exposure, we advise traders to be cautious with leverage.


How Long Do Commodity Futures Contracts Last? (Expiry Dates)


Futures contracts come with set expiration dates, after which they must either be settled or “rolled over” to a new contract.


Monthly Expiry: Commonly traded commodities like crude oil and gold have contracts that expire monthly.


Quarterly Expiry: Some commodities, especially in the agricultural sector, may have quarterly expiration.


The expiry date is crucial because all open contracts need to be settled by this date. Traders can either close the position or roll it over into a new contract before expiry.


Conclusion:


The commodity market offers incredible opportunities, but success requires knowledge, risk management, and strategic planning. By understanding the essentials—from trading processes and risks to margins and expiry dates—investors can confidently participate in this market. At Rakesh Bansal Advisory, we’re committed to guiding you through every step, helping you make informed decisions and maximize profitability in the dynamic world of commodities.


Whether you're new to trading or a seasoned investor, commodity markets provide a world of potential. With the right strategies and guidance, you can navigate the ups and downs of the market, making the most of every opportunity.

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