What kind of transaction is commodity trading?

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Investing in companies is a stock investment; investing in foreign exchange is FX, and commodity trading targets products familiar to us, such as gold, crude oil, and grains.

“Futures trading” is a transaction to buy or sell the target product at the current price by a specific date in the future. It is not always necessary to deliver the actual item. Before the due date, you can settle by giving and receiving the difference by counter-trading (sell what you bought, buy back what you sold) (contract for difference), or in-kind on the due date. You can also receive and hand over (gold bullions, etc.).

Role of Commodity Trading

Forming a fair price

Many people, such as producers, distributors, consumers, and investors, participate in the price determination in the commodity futures market.

If there are many buyers and few sellers, the price will rise until new sellers appear. When the price goes up, some people want to sell it, and this time, many sell orders are placed in the market, and the price tends to go down.

On the other hand, if there are many sellers and few buyers, the price will decrease until new buyers appear. If the price becomes cheaper, some people will want to buy it, and this time, many buy orders will be placed in the market, and the price will tend to rise.

In this way, a fair price is formed by the balance between the seller (supply) and the buyer (demand), which is called the market price.

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Avoid the risk of price fluctuations

Producers, processors, and distributors who handle products susceptible to price fluctuations due to the world’s political and economic conditions and the weather are hedging the risk of changes in their products’ selling and purchasing prices in advance in the commodity futures market. You can cover the loss by doing (insurance connection) due to price fluctuations. Those who participate to avoid the risk of price fluctuations in this way are called “hedgers.”

Providing a place for asset management

As the securities market, the commodity futures market is used by everyone as a place for asset management. Amid growing awareness of managing assets at your own risk, commodity trading is used as a diversified investment destination because it allows you to pursue profits regardless of whether prices rise or fall. In this way, those who participate in asset management are called “investors.”

  • Critical points for understanding commodity trading
  • Commodity futures trading has the opportunity to profit from both buying and selling!
  • Commodity trading can start with “buy” if you expect future prices to rise and “sell” if you expect prices to fall, allowing you to aim for profits in both growing and falling phases. 
  • The leverage effect can start commodity trading with a small margin of about 3 to 30% of the total trading price.
  • Due to the leverage effect, it is possible to trade with a small number of funds for the total transaction amount, so it can be said that it is a transaction suitable for those who are thinking about active asset management.

Commodity futures trading has a deadline.

Commodity futures trading has a deadline for each commodity to be finally settled, and either the actual item is delivered on that date (delivery date), or the difference is determined by counter-trading by then. Must be.

In addition, some stocks can be traded permanently (*) in principle, such as gold and platinum trading, which have no deadline.

Commodity trading is simple and easy to understand

Since the investment target is a product, unlike stocks, a company does not go bankrupt, and its value becomes zero overnight.

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Also, in Forex, if you have a sell position in a high-interest rate currency, you have to pay the swap interest rate every day, but since there is no interest rate receipt/payment in commodity futures trading, the price of that product will be in the future. “Do you go up? “Will it go down? Is the only point in buying and selling.

How to cover the risk of commodity futures trading as much as possible?

While you can trade with a small amount of money relative to the actual total transaction amount, the risk is also high, but there is a way to limit the loss in one transaction as much as possible.

Suppose you understand the relationship between risk and return and trade with a margin of funds while effectively using “stop-limit,” etc… In that case, it is possible to avoid a significant loss even if the forecast is wrong.

Risk of Commodity Trading

Commodity trading may result in losses if price fluctuations in the commodity futures market, exchange rates, stock markets, etc., change unexpectedly. Even if the range of price fluctuations is small, the total transaction amount is significant. Depending on the content of the instability, the loss may exceed the deposited margin.

Like stock trading, futures trading does not guarantee the principal of investment funds. Even if the invested company goes bankrupt and the value becomes zero in stock trading, there is no loss exceeding the principal. Still, in the case of futures trading, when the market price moves contrary to expectations, additional capital investment or yuan may incur more losses than books.

This is also a feature of “margin trading,” There is a system in which additional margin must be paid if the market moves unexpectedly and a significant loss occurs. This occurs when the margin ratio to the total trading volume falls below a specific value, and in some cases, it may be necessary to add a large margin with a slight price fluctuation.

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