Things You Must Know Before Investing in Commodities Futures

The commodities market is used for trading metals, cereals, spices, natural gas, crude oil, livestock, etc. Investors buy commodities to diversify their portfolio and generate better returns.

Buying and selling price of commodities is generally determined by a ‘futures contract’. A futures contract is an agreement between a buyer and a seller to trade a commodity for a predetermined price on a set date.

Trading commodities is not very different from trading in stocks. However, there are a few things that are different and must be understood before you invest in commodities.

Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth. 

Principles Of Investing In Commodities Futures

#1 Proper Portfolio Diversification

It is observed that the commodities market shares an inverse relationship with the stock market. It means that dividing investments between the two markets may help with portfolio diversification. 

But there are more convenient ways to diversify your portfolio. For example, you can invest in Digital Gold which is one precious metal that is always a good store of value. Read more about how to buy digital gold here.

Investing in digital gold is as good as investing in physical gold minus the overhead risks that it carries. Moreover, you don’t need to constantly monitor the prices with the aim of squaring off your position.

You can also explore digital gold by Safegold on the Cube Wealth app 

#2 Squaring Off Positions Prior to Expiry

Positions refer to market commitment held by a trader. If a position or trade commitment can still incur a profit or a loss, it is called an open position. A trade that has been cancelled is called a closed position. 

In simple terms, to square off means to make profits by selling assets bought on the same day for a price higher than the buying price. 

In commodity trading, investors almost always do not intend to take physical delivery of the commodity invested in. Therefore, it is important to square-off positions prior to expiry (the date on which the futures contract ends).

Read this blog to know more about commodity trading FAQs

#3 Track Margins

Margins on commodities are calculated on the value of the commodity contracts. The margin has to be deposited before taking buying/selling positions in commodities.

At times, investors may have to pay additional margins, which are imposed by the exchanges. Tracking margins is important to be aware of the costs that will be incurred in the process of commodity trading.

#4 Extended Trading Hours

Extended trading hours allow buying and selling of stocks or commodities beyond the usual trading hours. This could be before or after market hours. 

The primary reasons for introducing extended trading hours are to allow:

• Faster response to critical news that impact commodity prices
• Increased convenience to part-time traders
• Indian and global markets to be at par
• Exiting a losing position in order to mitigate losses
  

Being aware of extended trading hours may help avoid losses; or make big profits out of sudden market opportunities. But it is important to note that extra hours trading has some drawbacks as well. 

Liquidity is lower during extra hours trading as buyers and sellers may not be readily available. Due to lower volume, it might be difficult to execute complete trades. Investors might experience partial or no fills for their orders, in pre and post hours trading.

Also, investors might not get the best prices for their stocks during extended hours. This happens because sometimes, the after-hours stock prices may not be updated to regular hours prices.

Did you know that Indians can invest in the US markets? Read this blog to know more about US stock market timings.

#5 Assembling Various Classes of Commodities

If you are planning to invest in commodities, it is important to understand commodity classes. Five main classes or types of commodities are:

1. Energy - Natural gas, coal, crude oil, uranium, etc.
2. Precious Metals - Gold, silver, copper, platinum, iron ore, steel, zinc, etc.
3. Livestock - Lean hogs (pork), feeder cattle, live cattle, etc.
4. Grains - Wheat, corn, oats, rice, barley, etc. 
5. Soft s - Cocoa, sugar, coffee, etc.
   

Assembling commodities from various classes is recommended to keep a portfolio balanced. However, each of these classes, as well as the commodities within the classes, behave differently. 

Commodities are affected by various factors. Therefore, not all investors may feel comfortable trading them like stocks. Mutual funds and stocks are comparatively more convenient and familiar options, suitable for investors with moderate and high risk tolerance. 

Here’s how Cube Wealth helps you invest in the best mutual funds and stocks:

1. How To Invest In Mutual Funds In India?

2. How Purnartha And Cube Help You Buy Indian Stocks

Conclusion

Commodities may help beat the risks of the stock market. At the same time, it is important to understand that the commodities market is also very volatile. 

It is affected by a number of factors like geopolitical tensions, macroeconomic factors, equity market fluctuations, etc. Investors looking for lower risk investments can consider investing in: 

• Digital gold
• Debt mutual funds
• Liquid funds
• P2P lending
  

To know more about investment options better than commodity trading, download the Cube Wealth app today.