Key to a successful investing is to develop your knowledge in markets as well as to take few things slowly & methodically. Commodities and futures trading are of no difference and it is the exciting market, in case you are ready to put in time & effort, will be lucrative, but be aware that the risks lurk in shadows like other investment.
Physical Trading
The physical commodities trading are to buy and sell an actual commodity itself and not a few type of derivative instrument such as futures contract. Also there are some obvious downsides to all this technique namely insurance costs, storage costs, and shipping costs.
Physical market, for our particular purposes, focuses on all those commodities, which are very easily stored, bought & traded for an average investor. In addition, these are things as Platinum, Gold, and Palladium & Silver.
Most famous method of trading these items on the retail basis is in purchase of the coins. Also there are lots of companies on web, which give services for purchase of the coins for collectors & speculators.
Internet has given investors many choices for purchase, storage, & trading of the gold coins but our favorite example of gold trading on web is Bullion Vault. As they allow purchase & storage of the gold in very small quantities as well as have efficient trading system. Also they hold around $290mn of gold for costumers & seem to have very good reputation.
Leverage
In case you did not know this term ‘leverage’ then before present financial mess, you do it now. For people who need refresher, how it works. Let us say that you purchase £100,000 of gold & from whomever you purchase it off just needs you to put 10% deposit, £10,000. Let us say the gold goes up to 10% now you have the gold worth of £110,000, in case you sell that now you will pay back £90,000 that you borrowed & you get original £10k back all along with the £10k profit. Essentially, you have turned 10% of gain in a price to 100% gain on investment.
If price dropped to 10% then you lose all your money, thus mess that a few are in at a moment.
Physical Commodities on the Leverage.
There are a few companies that give an leverage on the physical commodities over a range of items, however, costs linked with the trading, like interest on the loans, storage as well as insurance fees have also made product very less attractive to active trader. So having filled gap in market for a time product was pass on by a few of instruments mentioned here.
ETFs
More precisely described as the ‘Exchange Traded Commodities’ all these instruments take in account all fees like storage associated with the trading and they trade just like shares are liquid.
Exchange Traded Commodity is the investment vehicle, which tracks performance of the underlying commodity or else basket of commodities. The ETCs work on same principle as the ETFs – with ETC tracking an performance of single underlying commodity or else group of commodities attached. Single commodity follow an spot price of single commodity, whereas ‘index tracking ETCs’ follow an movement of group of connected commodities, like cattle, energy and livestock.
ETCs offer a commodity trader many inherent benefits without associated vagaries of trading individual stock:
Liquidity – ETCs are all ‘open ended’ securities that are made & redeemed on demand. It means that supply of the ETCs is unlimited & that price changes may accurately mirror the developments in price of an underlying commodity.
Stamp duty and CGT – ETCs are not the shares & so trades are excused from the stamp duty. Moreover, ETCs is traded in ISA accounts, and allowing you to protect your profit from the Capital Gains Tax.
Low dealing costs – The ETCs are also traded on an regular stock exchange, and making them accessible & affordable – they are traded through the share dealing service for commission.
Portfolio diversification – The ETCs give a broad representation over whole commodity sectors & different geographic areas.
Futures
Futures contract is the agreement to purchase or else sell your selected commodity at the specific date in future – at current prevailing market range. All these markets are liquid & contracts are sold on once again at any point prior to final delivery date, that is day when farmer or else miner may deliver raw materials to person holding this contract.
Producers and end users are present in current markets, however it is traders & speculators who are responsible for majority of volume, which keeps market liquid.
Main benefit of trading futures is you are making direct investment in an underlying raw material & your future loss or profit is very dependent on fluctuations in underlying commodity rate.
Futures Trading Academy is unique and independent investor’s guide to futures and options trading.
