Did you know that the estimated global value of the commodities market is now in excess of $142 trillion dollars? It is clear that these unique assets offer lucrative investment opportunities, particularly for those with the necessary capital. The intention of this article is to provide a clearer picture of how much liquidity a trader may require to become proactively involved in the commodities sector. We will also address related topics, such as additional trading fees, brokerage costs, and how investment goals may affect the capital required.
We can now see that there is much more than meets the eye if you hope to enjoy long-term success. It is already a foregone conclusion that partnering with a trusted commodity trading broker should represent the first step. You will then need to answer another entirely practical question. How much money is required for commodity trading? Let’s do away with the proverbial smoke and mirrors and directly address this topic in more detail.
We should begin by noting that commodity trading differs slightly from other underlying assets, such as blue-chip stocks. Entry-level requirements are often based on margins. Although there is not (normally) any fixed minimum, brokers will stipulate specific margin thresholds associated with the contract. These can range from 5% to 10% of the aggregate value. In other words, larger positions will require a more substantial capital outlay. Note that additional variables will be discussed below, as they can also affect the costs associated with a specific position.
We have already established that contract sizes will directly correlate to the price that investors can expect to pay. Thankfully, rough guidelines can be used to provide a general estimate of the associated entry-level costs. Here is a summary of the three types of contracts that are generally available:
As this hierarchical list suggests, the costs of a mini contract are higher than those of a micro position but lower than those of a full (standard) contract. One issue here is that prices vary between brokers. This is why it is important to perform research well in advance.
Another point to mention involves the terms and conditions attached to a specific contract. Entry-level thresholds, the time the asset needs to be held, and the presence of mechanics such as stop-loss orders are examples. Not only might these impact the profitability of the position, but they could also appeal to certain types of investors. Once again, be certain to read the contract terms carefully to understand the “fine print”.
As mentioned in the previous section, one of the most relevant concerns involves the minimum amount of capital required to open a commodities position. In this respect, there is no “golden rule”. Different trading platforms cater to specific types of investors, offering a wide array of options.
For example, those engineered for entry-level traders may advertise minimum deposits as low as £10 pounds (or the currency equivalent). Those associated with institutional trades could raise the thresholds considerably higher, perhaps into the hundreds of pounds. However, it is equally important to note that higher minimums may indicate additional benefits (such as high liquidity and/or low spreads).
Exchanges have also been known to charge fees. Some factors that apply include transaction charges, contract type, and trading volume.
Some readers may also be surprised to learn that contract costs can vary between different regions of the world. While there are many metrics that may cause such fluctuations, one predominant underlying factor involves regulations. Furthermore, we need to remember that exchange rates can directly affect the value of a position (depending on the currency used in the transaction).
Another variable is associated with areas of the world that are focused on commodity exports, as transportation costs may impact the price of a contract. These include:”
Those who wish to fully appreciate the total value of a position before executing a trade are encouraged to use an exchange rate calculator. These provide real-time currency conversions according to the latest Forex data. It could also be wise to determine the physical headquarters of the brokerage platform.
The costs attributed to a commodity trade are not limited to entry-level obligations and exchange rates. Several other metrics will often enter into the equation. The spread of the position will also (potentially) impact the ultimate cost. Spreads determine entry and exit points, so wider spreads could reduce overall profitability (especially for traders who wish to employ scalping as a short-term strategy).
It is now clear to see that the costs associated with commodities trading are not static in nature. Once again, investors should clarify the points mentioned above to accurately determine how much capital will be required to enter into a position. These must then be balanced against potential profit margins. Wide spreads likewise signify that the trader is paying more to enter into a position, and receiving less once the position is closed. This results in higher costs per transaction.
We mentioned the total value of commodities holdings previously, and this is another way of describing a term known as position sizing (the number of units associated with a commodities trade). Why is position sizing important? The size (value) of a position will often determine the underlying levels of risk.
The principle here is decidedly straightforward. Larger contracts can incur substantial profits, or equally detrimental losses. This is also when risk-mitigating strategies such as setting conservative stop-loss points represent powerful tools.
There are likewise instances when the size of a position (and therefore, the cost) should be reduced. For example, it is prudent to limit your overall exposure during periods of high market uncertainty or if a major commodity-related announcement is expected to be made. The professionals at Eurotrader are always able to provide additional guidance, especially during times of volatility.
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Another useful approach is to consider opening a mini commodities trading account. These offer several notable advantages including:
Some commodity investors may likewise choose to work in tandem with a proprietary (prop) trading firm. As the term suggests, these firms use their own capital to execute commodities transactions. The only issue here is that prop trading is generally limited to larger institutions such as banks, building societies, and hedge funds. Existing clients may experience a small portion in the profits derived from a commodities position in the form of longitudinal payments such as dividends.
Therefore, prop trading is sometimes preferred by those who are more interested in securing a long-term position with guaranteed yields as opposed to a liquid contract that may be subject to periods of volatility.
A final point to mention involves what it is that you are hoping to achieve. Similar to other investments, commodities can be approached in many different ways. For example, those who are primarily interested in generating short- to medium-term profits will often utilise commodity CFDs to avoid being locked into a position for an extended period of time.
Long-term holds could instead be preferred by traders hoping to take advantage of long-term price trends; an approach that is inherently more conservative in nature. Note that this strategy is yet another way to create a balanced portfolio and to offset sudden movements associated with more liquid assets.
The main takeaway point here is to evaluate your appetite for risk in relation to the potential for reward. These principles are equally applicable when referring to online Forex trading, ETFs, cryptocurrencies, and mainstream blue-chip investments. It is crucial to define your desires well in advance.
While these two approaches do not necessarily impact the ancillary fees discussed earlier, hedging through the use of derivatives trading has been known to mitigate financial risk. In other words, one position within the marketplace can be used to offset potential losses in another. For example, a strong United States dollar will often lead to decreased commodity prices. Rising bond prices may likewise hint at lower interest rates, signalling more bearish commodity conditions.
While some investors may consider speculation, this is normally not the best approach in terms of stability. Although there can be times when betting on price fluctuations may result in short-term profits, the volatile nature of such positions frequently contributes to a higher degree of inherent risk. Simply stated, speculation should only be employed by those who have a significant amount of experience and are not averse to risk.
As always, let’s conclude by answering some common questions that Eurotrader often encounters.
While there are no discrete minimum thresholds, most experts recommend investing a minimum of £1,000 pounds. Note that the exact amount will vary in accordance with the underlying asset and the broker in question.
These will be determined by the third-party investment portal, and they often include other factors such as spreads, commissions, and holding fees.
This final recommendation applies to any type of investment. Partner with a reputable online trading firm. Study the fundamental and technical aspects of the underlying asset. Clarify the level of risk that you are willing to accept. Perhaps most importantly, remember that mistakes will be made along the way. These should be viewed as learning experiences as opposed to setbacks.
Did this article pique your interest in commodities trading? If so, the experts at Eurotrader are more than happy to address any other questions that you may have. Please take a moment to contact us. A brave new world awaits.
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