Commodity online trading
The intrinsic value of the commodities makes them immune to bankruptcy. This very nature of commodities is the great advantage of trading in commodities over trading in stocks. The trader can make leverages in many thousands in the ratio of pennies against a dollar. This is unlike the stock trading where 10,000 dollars are needed in investment to leverage 10,000 dollars of a certain stock. The volatility of the stock market can be dangerous for the investor as it may result in heavy loss if not traded with caution and expertise. Trading in commodities allows the investor to participate in almost all areas of the world economy.
Commodity Online Trading is a great way to make money sitting in front of the trading screen. The returns from commodity trading are largely independent of the real estate, bond and stock markets. Practical wisdom dictates that when commodities are added to a portfolio of various diversified investments, the overall risk factor is considerably lowered. The Commodity Futures Trading Commission, CFTC monitors the industry.
The history of commodities markets:
Food production was augmented with using technology and improved efficient tools after the Industrial Revolution. The economic development was at par with the population growth. The living standards also started to rise. The increase in production resulted in the need for more storage space and also efficient transportation of the food grains. Initially cash markets were able to handle these needs and with the passage of time, the ever growing production and large quantities of produce necessitated the future markets to regulate the price, quality and distribution of the bumper harvests. The purchasers have found a way to steer clear of the price. The commodity price was locked in well in advance of the time they were actually needed. The trader can profit taking advantage of any fluctuation in the prices by buying or selling the commodities according to the situation.
The emergence of commodity markets
Historical evidence points to the existence of age old future contracts for commodities like spices and olive oil etc, during the nineteenth century. These contracts were carried out by the Persian shipping merchants. In the US the futures trading took roots in the middle of the nineteenth century in Chicago with corn and cotton being traded in New York through the futures contracts. These are the earliest instances of futures trading in the commodity markets. More goods were included and techniques and methods developed to deal with commodities on an international level.
Futures contract
The futures contact is the unit of exchange for trading commodities in the market. The contract contains details such as the specific date, time and place of delivery of commodities in the future. They also indicate the name of the commodity and the quantity, whether bought or sold and the amounts involved and the holding positions. The procedure to trade in the commodities is standardized as contracts with specific units for each contract. These commodities are completely interchangeable and the contracts are the binding instruments for trading in all commodities.
The trading process online and conventional
Most of the US futures exchanges and particularly the Chicago Mercantile Exchange have two different platforms for trading in commodities, namely the conventional floor trading and the electronic form which is also known as online trading. Both the forms are same as far as the placing of orders for buying or selling and execution of these orders. The buyers and sellers at a particular price are matched in both the outcry and the electronic mode of trading which is online trading. The outcry method involves the bidders being present in the trading pit. In the electronic mode, the orders are placed and executed electronically through the computers and the internet, eliminating the need for the physical presence of the bidders for trading. However, there are some differences in these two methods of trading.
Outcry trading
In the outcry trading, the orders are conveyed to the brokers who are present in the trading pit in the exchange through telephones or computers. The brokers place the bids of the customers and if another broker accepts the bid, the trade is executed. This means that a buyer and seller of the particular item at the mutually agreed price is identified and matched. The customers are informed about the trade and the trading details like the price, brokerage and other details are sent to the clearing house. This process is carried out instantly throughout the world. The exact time at which the trade has taken place is stamped on each contract.
Electronic trading or online trading
The electronic trading involves placing orders through computers that are conveyed to the electronic market place in the exchange. This eliminates the need for the brokers to place orders personally. The customers receive electronically the information of all the trading activities he has carried out on a particular day. The trading screen which contains the names of items traded in the market, their prices and quantities and they represent the trading pit. The brokers bidding in the trading pit are replaced by the market participants. The top five prices on offer are displayed on the screen which can be viewed by all the customers and they can place their bids accordingly from their computers. This makes the dealings very transparent as against the outcry method as the brokers do not have this information. The details of the trades executed are instantly displayed on the trading screens for all the customers to see from their own computers. For example, the CME Globex flashes the transactions within a fraction of a second form the time of the trade actually takes place. Some complex orders may take a few more seconds for execution of the order depending upon how complex it is.
Understanding Commodity futures
Money is made by commodity online trading taking advantage of prices changing constantly. The leverage of gains or losses in the futures market is very high. The leverage is generally very high when the margin investment required is very low. All said, we can conclude that with the multiplicity of prices driving the markers today, there is a lot of money to be made in the commodity markets!
Today it is only the world of online trading that is picking up and everything is done at just the click of a mouse. A person naturally need not be present at a particular place to trade with a product. This method of online trading is fast and reliable as well.
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