Commodity Trading – Chapter 6: Disadvantages of commodity trading

This is chapter number 6 out of 13. Read the rest:

Read Commodity Trading – Chapter 1: History of Commodity Trading
Read Commodity Trading – Chapter 2: Commodities Trading
Read Commodity Trading – Chapter 3: What is traded?
Read Commodity Trading – Chapter 4: Using Commodity Trading as an Investment Vehicle
Read Commodity Trading – Chapter 5: Advantages of commodity trading

1.Speed of trading – Commodities used to be traded in the pits. Thus in order for any order to
executed, an investor or speculator need to contact his broker who in turn will transmit this order to the pit trader. Upon executing the transaction, the pit trader with inform the broker of the trade who will pass the confirmation to the client. Due to the time lag, the chances of slippage occurring is high.

Nowadays, online Futures trading helps to minimize the time lag between the client and the exchange by providing a direct link.

2.Leverage – Low margin prerequisites can encourage poor money management, which can in turn lead to unnecessary risk taking. Thus in this case, not only are the potential multiplied, the potential for losses is also increased many folds!

3. Risk of Physical Delivery – There is an actual risk of having to take physical delivery of the commodities. Imagine waking up one day to find a truck of soya or oil waiting on your doorstep! However, in most cases, actual physical delivery is not acted upon. Most Futures contracts are just settled through cash once the tenure of the Futures contract has expired.

4. Risky Business! – Trading in commodities has been regarded as something just for the experts. Many traders have lost money and the trade is regarded as an extremely risky venture.

As mentioned earlier, commodities trading is as risky as the individuals wants it to be. How careful or careless a trader is depends on him. An individual can deal with commodities cautiously and risk only a couple of hundred dollars per trade. The main problem is that most people are impatient. They follow the saying “the best way to make a small fortune trading commodities . . . start with a big one.” By taking reckless risks, they only ended up hurting themselves financially. Another reason why these individuals lose their money is that they turn over control of their money blindly to others people like brokers or fund managers. 

Read Commodity Trading – Chapter 7: Risks of Commodities Trading
Read Commodity Trading – Chapter 8: Risk Management
Read Commodity Trading – Chapter 9: Steps To Undertake While Trading In Commodity
Read Commodity Trading – Chapter 10: Commodity Trading – a losers Game?
Read Commodity Trading – Chapter 11: Learning to Trade Commodities
Read Commodity Trading – Chapter 12: Creating a Trading Plan
Read Commodity Trading – Chapter 13: Stress of Commodity Trading