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Dos and don'ts of commodity trading
Dos and don'ts of commodity trading

Do’s

Don’ts

Ensure you thoroughly read the exchange guidelines as well as the circular which can be accessed on the exchange website. Visit multibank group

Do not believe the market rumors you might hear.

Take into account the Forward Contracts (Regulation) Act {FC(R)A}, 1952 before you begin dealing in futures trading in commodities

Do not base your market behavior on the bull/bear run of market sentiment.

Before you start trading, read through the rules, regulations, bye-laws, and circulars that the Exchange issues. The same can be accessed on the websites of the respective exchange

Do not fall for an explicit/ implicit promise to any analysts/ advisors/ experts/ market intermediary makes, until you’re sure about it. 

Go through commodity contract specifications as well as any related circulars carefully. Watch out for any recent modifications.

Do not fall for any reports/ predictions that the media makes, be it print or digital unless it is properly verified. 

Make sure you fully comprehend the commodity and price-impacting parameters prior to taking part in commodity futures

Do not trade in any commodity if you’re not fully aware of the risk and rewards that come with it. 

Spend some time understanding the historical and seasonal price movement and keep an eye out for important Government Policy announcements.

Do not trade on the basis of long-term price prospects of the commodity unless you’re familiar with how much risk you can take in the short term. 

Take into consideration the risks which come with your positions in the market and how you react to margin calls on them. Remember that unfavorable price movements often lead to higher margin requirements.

Do not allow the risks you take for a position to a point where you find it hard to stand them or afford them. 

Withdraw/take home mark-to-market margins for your futures position regularly from/to your Trading Member in accordance to the Exchange rules and regulations

Do not undertake commodity transactions off-market as they can be risky as well as illegal

Emphasize on reading as well as signing a ‘Risk Disclosure Agreement’.

Do not start trading before you read and understand the Risk Disclosure Agreement

Make sure you pay the required margin timely while taking the time to understand the repercussions of non-payment.

Do not cause any unnecessary delay in payment/ deliveries of commodities to Members. 

Make it clear to the Member who would be placing your trade orders. 

Do not authorize an Exchange member to buy or sell on your behalf and also do not give up your right to receive contract notes regularly. Portfolio Management Schemes (PMS) is not allowed in commodity markets.

Make sure your Contract Note includes all necessary information, like Member Registration Number, Order No., Order Date, Order time, Trade No., Trade Rate, Quantity, and Arbitration Clause.

Do not accept an unsigned/ copied contract note/ confirmation memo. Do not accept a contract note/ confirmation memo that has the signatures of an unauthorized person.

It is necessary for you to be fully aware of the important details about the Companies when you are investing in their equities. Find out the company’s history, its present promoters, the top management, and the kind of growth plans they have. Also, take into account how the share has fared over the course of the last 12 months.

Going by the gut or by hearsay and the advice of others may not always yield good results. 

Make sure you’re focussing on diversifying your portfolio. It is best to have 10 to 15 stocks in your kitty which represent big size, midsize, and even small size Companies. This would take into consideration risk as well as growth. In Commodities, it is advisable to spread out into different commodities such as Agriculture, Energy, and Metal sectors.

Leading investors would tell you that diversifying too much is as bad a strategy as having all your eggs in a single basket. If you have more than 50 Companies, you’d have to keep track of what’s going on in all of them which can be very time-consuming. 

When you choose to invest in a stock, stick to it. You reach that conclusion after a lot of consideration. You might have taken into account your growth prospects, so sit back and wait for the good returns to show up after a certain amount of time passes. Respect your own decisions and hold on to them in short and medium terms.

Don’t panic.

Your share price could be falling but that need not be a reason to sell it quickly. Rather, look for the factors which explain why your share price is falling.

It is best to be clear about your own financial capacity and position. The risk you’d like to take, the kind of profit you’re eyeing, and how much loss you can stand are all factors that can help you build a strategy and make decisions in stock and commodity trade.

This implies that you should not ever make big investments in a single stock or commodity. It even translates to the fact that you should not go after a stock if its rate increases rapidly. Be patient and take some time out to think before you reach a decision. Understand that you can’t make any game-changing profits overnight so avoid large risks as well as unplanned investments.

You need to be well versed about brokerage fees,

security transaction taxes, capital gains tax as well as other laws which could affect your trades. Should you want to sell or buy a stock or commodity,

the expected expenses must be on the top of your head. 

It implies that you need not make a transaction for minimal gains as your profit will be consumed by the brokerage fee. 

You could have your own picks in both stocks or commodities. It is a good idea to put your money into companies that you look up to and the ones that have great products. Maintain a list of these kinds of companies and also keep updating them annually on the basis of their performances.

Do not hold on to these companies or commodities stock if you come across negative news/reports about them. Several investors make the mistake of holding on to a stock because they have blind faith in the company.