“Trading commodities online is a relatively straightforward operation, but it’s not an endeavor you can try without doing some diligent research,” said the renowned commodity investor Josip Heit. A commodity is any raw material that is used to manufacture a finished product. Commodities can be mined, grown, or extracted and have no value added to them.
Although minor price differences may exist among different producers, a specific commodity practically has the same value irrespective of its origin. The value is determined only by certain market factors such as a specific commodity’s demand and supply as well as the amount that is getting invested in it.
Josip Heit, who is currently acting as Chairman of the Board at GSB Gold Standard Banking Corporation AG, is a successful commodity investor that shared some of his thoughts on how to get started as a commodity trader.
The traditional way of commodity trading involves calling a commodities broker to place orders and then waiting for a call-back to learn the price of the filled order. This method, however, is less efficient than online trading. Therefore, adopting the online trading method could be better and more effective.
Commodities can be classified into four distinct categories:
- Precious metals, such as gold, platinum, and silver.
- Energy, like crude oil and gas.
- Agricultural commodities, e.g corn, cotton, sugar, and wheat.
- Livestock, including live and feeder cattle.
Choosing a commodity broker is your first step in setting up an online account
Choosing your desired commodity broker is an important task for trading commodities online. Nearly all commodity brokers offer online trading, but some are specialized in it. TradeStation, for example, is an online broker site providing flexible trading in order entry, strategy analysis, charts, and quotes.
Brokers such as Interactive Brokers and Options Express also offer good services and low commission rates.
Completing paperwork with your commodity broker
Documentation of some vital financial information is a requirement when opening an account with a commodity broker. This helps to identify the risks involved in trading commodities.
Collecting financial data is essential because commodities are highly leveraged financial instruments. As such, there is a high risk of losing more capital than originally invested. A broker will, therefore, require information on creditworthiness, income, and net worth to determine if they can and want to work with you.
Further, just completing the account forms does not necessarily qualify you to finalize the opening of a commodities account. A broker may use his or her discretion to judge whether a potential customer’s profile meets the criteria for commodities trading.
Things to note before you start trading commodities
Once you are done with the previous steps and get approved, you will need to fund your account. Although most brokers have minimum funding limits, how much money you invest on top of the minimum is your choice to make. Your level of comfort and perception of risk are important considerations when funding an account.
It is important to develop a well-researched trading plan before you start trading with actual money. According to the successful commodity investor Josip Heit, it is necessary to develop a well-researched trading plan before you commence your trading journey and to avoid replicating other people’s plans, as what works for others might not work for you. You can test your trading skills with a demo trading account, which simulates trading, provided by your broker of choice.
Simulations help newbies in developing trading experience and assist them in building and adapting to a strategy that works better for them.
Things to keep in mind as you start trading
It is important to understand what comprises the futures and options markets. These are branches of the commodities market, which is where the physical delivery of the commodities takes place. With a derivative simply being security that has its value derived from the underlying asset, in this case, physical commodities.
Therefore, understanding the underlying fundamentals of supply and demand for the commodities and derivatives being traded is indispensable. Commodity markets and trade organizations provide a wealth of information at no cost. Government agencies also offer information on commodities for free.
Futures and options markets are rife with risk. Such instruments provide a huge amount of leverage. While there is an opportunity to make huge profits, this is accompanied by high-risk potentials. Therefore, trading futures and options require a good risk assessment.
Closing thoughts on getting started with commodity trading
As you start your journey on this new path, do your strategic analysis and treat these volatile instruments with caution. Although one could make a fortune trading commodities, there is a big room for losses.
Mastering online trading calls for a level of expertise resulting from diligent work and study. Make use of all the information available at your fingertips. The success of a commodity broker depends on how successful their traders become, therefore, their ultimate goal is to see you master your craft.
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