4 Myths About Commodities Trading that New Traders Will Do Well to Ignore
By TLB Contributing Financial Writer: Jeff Broth
Commodities trading is one of the oldest businesses in the world – it predates the business of trading stocks, bonds, or forex. Many ancient civilizations were built on the strength of their trade on commodities such as salt, spices, seashells, and precious metals. Commodities are germane to commerce, economic development, international trade, and cross-dependence among nations. In the modern age, commodities trading has grown from a practical economic activity to become a speculative trading activity.
Other than corporations that need commodities as raw material for commercial activities, many of the people trading commodities are only trading the price differentials between the spot (current) price of commodities and their potential future prices. Hence, the knowledge of commodities trading is usually built more for derivatives trading than the actual sale and physical delivery of the commodities.
Commodities trading adds an extra layer of diversification to your investment portfolio because the price of commodities is mostly moved by the forces of demand and supply, as opposed to stocks and forex, which are moved by a host of different factors. Unfortunately, many traders shy away from commodities trading activities because of some age-long myths.
1) Commodities trading is a guaranteed way to lose money
The first and probably most debilitating myth keeping people away from the commodities market is that you are more likely to lose money than to make money as a commodities trader. People lose money in all kinds of business ventures and losses are by no way particular to commodities trading alone. People lose money in commodities trading because they lack an understanding of the market or because they make rash trading decisions.
Professional traders and amateur traders have decent odds of making money trading commodities by paying attention to factors that could affect the demand and supply dynamics of their cryptocurrencies.
2) Leverage in commodities trading is bad
The second myth ailing the commodities trading industry is that leveraged trading is an evil strategy created to frustrate traders out of the market. With leverage trading, a trader with a $20,000 account can control commodities trade worth $200,000 in a 1:10 leveraged trade. If the trade goes well, the trader can essentially double their initial $20,000. However, if the trade goes south, the initial $20,000 might be wiped out and the trader might still be liable to provide additional money to cover outstanding debt.
However, all forms of derivative trading provide traders with a measure of leverage, and leverage, when properly utilized can help traders record exponential gains even with borrowed money. If you master your emotions and refrain from making rash trading decisions, leveraged trading could be an ally for profitable commodities trading
3) Commodities trading require a huge starting capital
Many people erroneously assume that you’ll need a huge trading capital before you can participate in the commodities trading market. The erroneous belief stems from the fact that the price of commodities cost a great deal of money relative to stocks. For instance, gold is currently selling at $1,344 an ounce, Soybean has a spot price of 1,017.25 and the spot price of Cocoa is around $2,516.
However, in reality, you don’t need a huge trading capital before you can start trading commodities. Some brokers will allow you to open a commodities trading account with as low as $2000. Of course, the more money you have in a trade determines the amount you can make in profits. Nonetheless, you can always place leverage trades to book more profits from borrowed money.
4) Someone will dump a truckload of wheat on your front door
Another prevailing myth among people that are ignorant about commodities trading is that you’ll be under obligation to take physical delivery of commodities. If you are trading soft commodities such as wheat, soybean, or corn, the myth holds that the seller might bring a truckload of the commodity to your doorstep at the expiration of the contract.
However, commodities trading mostly involves derivative trading and traders don’t really need to worry about taking delivery of commodities. If you close your contract before the first notice day, you don’t have to worry about the delivery of the commodities. If you miss the first notice day, your broker will spot the oversight and send reminders to you to help you take prompt action.
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