Why to Invest in Commodity Futures?

Experts and HNIs who have the financial means and willingness to tolerate large losses in a short period of time invest highly speculative equities. If you don’t mind losing, why don’t you try it? If you can make $50,000 in 5 minutes, you might love trading commodity futures contracts. Futures stock dealers have an ancient adage: “It’s simple to make tiny money in commodities.” Simply begin with a hefty amount!

Commodity futures in online trading are unsuitable for those who are terrified of losing their money. People who experience mental distress as a result of losing their money. Due to their ignorance, a number of naïve “investors” are enticed to make money month after month by investing in commodity markets. Why is this case? Because of the possibility of achieving bigger returns in a shorter period of time by utilizing the built-in leverage that commodity futures traders have access to.

Also Read: Understand Everything about Indian Stock Market Basics.

What factors influence the price of commodity futures?

Oil, gold, silver, heating oil, lumber, money, wheat, corn, soybeans, and a variety of other typical trade products are all part of the commodity markets. Commodity “futures” contracts are used by large corporations operating in these markets to lock in their selling prices for the product in advance of delivery. Hedging is the term for this strategy. The trader is on the other side of the transaction, speculating on whether the commodity’s price will rise or fall before the contract is due for delivery. Futures contracts lend themselves to speculation due to the fact that they can be purchased using leverage.

Control of a wheat contract worth 5,000, for example, may only require 500 in cash or 10% of the contracts face value. If the price of wheat rises, and the contract is worth, say, ₹5,500, the speculator has profited by ₹ 500 on his or her initial investment of ₹ 500, for a 100 percent return. When compared to the ordinary stock market, where leverage is limited to 50%, a ₹ 5,000 stock requires a minimum of ₹ 2,500 in capital. If the stock rises in value to ₹ 5,500, the 500 gain is offset by the ₹ 2,500 invested, yielding only 20% return. Isn’t it true that a 100 percent return seems a lot better?

Read more: Stock Market Trading Strategies for Starters.

You now know why even typical investors rush to invest in high-risk commodity holdings. That’s how the allure of high earnings employing maximum leverage in commodity futures trading seduces novice investors looking for quick returns. The actual issue is that leverage works in two ways: high risk equals more profit or high risk equals greater loss. Due to the extreme price gyrations that sometimes occur in these volatile markets, you may lose your entire investment in a matter of minutes. Let’s imagine the value of the ₹ 5,000 contract falls to ₹ 4,000 instead of climbing. You’ve not only lost the original ₹ 500 you put into the contract, but an additional₹ 500. You can go broke quickly this way. So +100 percent easily turns into -100 percent in some minutes.

It is highly recommended to rely on established stock broker tips and invest conservatively in commodity futures, making it part of your investment portfolio. Average investors should make commodity futures as low as 10 percent of overall investment portfolio, gradually gaining experience and profits should pave way for more exposure in terms of share trading investment.