Trading in any segment of the market is profitable as well as very risky too. Similarly trading in commodities gives you great opportunities to well on your invested capital. Whereas it is also very risky, you can lose the whole money in just a blink of an eye. Thus, traders take commodity tips to minimize the chances of risk.
Futures market is a place where people can trade standardized futures contracts. It is an auction market in which buyers and sellers are participants, they buy and sell commodity and futures contracts and it is very risky.
Risk is often synonymous with commodities. There are so many people who are not involved in the commodity business and believes that the prices of commodities are wild bucking broncos, and these people are often correct. In this huge amount of population, only a few portion of the population understands commodities and they are also willing to participate in the speculative arena. However, volatility and risk create opportunities for profits. The masses often misunderstand the risks inherent in the commodities markets.
The main reason why commodities are a risky proposition because they are trade on futures markets which offer a high degree of leverage. Normally, in future margin a commodity trader only has to post 5 to 15 percent of the contract value to control an investment in the total contract value.
Risks Rewards and Volatility
Reward is a direct function of risky. Greater rewards come with a higher degree of risk in the world of commodities. It takes a small amount of margin to control a large amount of a commodity as commodity futures are leveraged instruments. Therefore, a trader or investor can make a lot of money, but they can also lose a lot. Commodities are the most volatile asset class. It is not unusual for the price of a raw material to half or double, triple or more over a very short time.
Commodities are very risky assets. Therefore, good judgment, precaution, and knowledge about the instruments that you are trading or investing in are of particular importance in the commodities futures arena.
There are some other assets which tends to have lower variance and more liquidity than commodities which are stocks, bonds, and currencies. For example, the daily volatility of a currency like the dollar tends to be lower than 10% while the same metric for a commodity like natural gas tends to be above 30%.
Commodity trading is risky for both amateur traders and professional traders. However, you can also earn well by trading in commodities by taking services and ideas about market performance from a well known stock market advisory . Traders need to understand the changes occurring in market because market changes everyday.
I am financial analyst and I like to read and write about the stock market. I wrote many articles on stock market. Hope you will find my articles helpful and interesting. And for investing in commodity market.