Due to the complexity of the commodity market, many commodity investors and traders hesitate to invest or trade in the commodity market due to a wide variety of myths among the investors regarding complexity, volatility, risks, and big requirement of money among others. Well, some people will admit that all these things are right about commodities but truth is, most of these misconceptions are nothing but “myths about commodity trading”. And the people who spread such words are none other but traders who have lost a lot in commodity trading and who view the market as too difficult to trade.
As a result, such people succeed in convincing that “nobody can make money in trading commodities.” In reality, there are plenty of traders who are successful in making money from trading commodities. But, to ensure you won’t fall for such trap, we would like to mention some popular myths about commodity trading which holding many traders back from investing/trading in the commodity market.
Too Much Leverage
By far, it is the most troublesome issue with commodity trading. Unlike stocks where only 50 percent of margin required, the commodity trading requires you to pt only up to 15 percent of the margin of the total value. It could be in a range of 3 to 15 percent.
To me, it is both a blessing and a curse. If you are a newbie in the commodity market then I would never recommend you to take advantage of this incredible leverage. Besides, the rookie traders find Stop-Loss to be bothersome while trading commodities. Without the SL, the risk of your trade increase drastically.
But, with it, the commodity market is not so different than the stock market. If you leave the leverage factor then it would be just the same.
For better understanding, let’s take an example:
Let’s suppose you planned to trade in stock in futures at Rs. 5,000 per share. You are thinking of buying 5 stocks which would require you to have an Rs. 25,000 in total. But, since you are provided 50 percent margin in stocks so even if you have Rs. 12,500 that should work out.
In doing so, you added Rs. 12,500 in your leverage account and used rest Rs. 12,500 as leverage. Here, in this trade, 50 percent of the money is yours. It means you can bear a loss of up to 50%. But, if we talk about the trade in commodities futures, let’s suppose you are planning to buy crude oil which is an Rs. 4,000. In this case, you will need Rs. 4,000 x 100 = Rs. 400000 to buy a lot of crude oil.
As we mentioned above, the commodity market would only require you to have a margin of 3 to 15 percent. Let’s assume your brokerage firm said to maintain only 10 percent margin to trade in crude oil. In that case, you will only need to maintain Rs. 4,000 in your DEMAT account rest can be covered through leverage.
In case of a loss, you will end up paying much more than you added in your account. In short, the investment can be wiped out. But, it is not guaranteed. All you have to do is to be a little smart and plan your trades carefully after analyzing the commodities.
Worries over Physical Delivery
Sometimes traders unnecessarily worried over the delivery of physical commodities. I understand if you are not planning to wait for such a thing but don’t worry! As long as you close your futures contract before the notice day you don’t need to be worried about anything. Besides, only commercial players and traders are involved in physical deliveries.
Furthermore, if by some chance you forgot the first notice day, your broker will remind you of this.
“Nobody Makes Any Money”
No doubt people lose money while investing in the commodity market. But, tell me one thing – Who doesn’t? After all, it is a zero-sum game. For every rupee lost, someone gains a rupee. So, if somebody is losing, on the other side, somebody else is winning.
Many professional traders trade smartly and follow a strict trading discipline that most novice traders couldn’t follow. But, it doesn’t mean that no beginner trader can make money out of trading commodities. If you do your research properly and not fall for such myths then you can make it and end up making potential profits in a short period of time.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.