There a number of myths surrounding the equity and commodities market which deter even the experienced investors from utilizing the most of this market. Such myths are usually created by investors and traders who have been at the losing end or those who find this market to be too complicated to crack. However, investment market functions according to the same principles of economics that apply to all trade markets and hence there is no truth to these myths.
Investing in stocks and commodities is like gambling. – FALSE
If an investor has researched and studied the market well enough, any investment would be an informed one with clearly defined and calculated risks, just like any other market. It would be surely be a gamble if one invests without having proper experience and understanding of the nuances of this market. And that’s true for any other trading market as well.
Shares & Commodities market is too volatile to make a profitable investment. – FALSE
Every investment marketplace is different in terms of volatility and requires a significant amount of time and research to analyze the trends, patterns and cyclicity. Simply because a few investors are not able to crack the code, doesn’t mean that nobody can. There are simply no shortcuts here.
Nobody makes money by trading stocks & commodities. – FALSE
This assumption is illogical and absolutely nonsense.
Why?
Simply because whenever loses money in an investment market, there’s someone gaining at the other end. So it’s safe to say that before one makes a judgment call, they must apply their sensibilities and logic to the entire situation.
Here are a few pointers for beginners in commodity trading.
These will help you get an insight into how you can avoid falling into a downward gambling spiral.
- Diversify
There appears to be a lot of leverage while investing in stocks or commodities market. An investor would be required to put up part of the overall value of investment, and not the entire value, which leads a lot of investors to invest a large capital amount in a single stock or commodity through multiple contracts with the intention of earning quick profits in a very short term.
However, investments market is a long term game and requires meticulous study of the market, an understanding of trends, effects of changes in political environment, etc. A single downturn in the stock or commodity prices can eat up your investment. Simply stated, do not put all your eggs in one basket. Spread your investment across multiple stocks and commodities in order to balance out potential losses with potential profits.
- Stop-loss orders
Most investors would be aware of the stop-loss policy, a mechanism to limit losses. A stop-loss order is an order with a broker to sell or buy once the commodity reaches a certain point. This would be based on the assessment of how much an investor is willing to lose in case of a downturn. If an investor has a threshold of bearing a 10% loss, a stop-loss order will ensure that the losses do not increase beyond the 10% limit.
This helps investors take stock of the situation and apply different strategies as permitted by the market conditions.
- Study the market
Thinking of investing in a set of commodities? You better have a basic sense of how it’s been operating in the past few years. An understanding of the factors that have a cause and effect relationship with the commodity prices will provide an insight into which commodities are likely to be steadily profitable in the long run. A study of the losses incurred by investors in the market and analyzing their entry and exit points in the market can educate an investor about the basic dos and don’ts.
There are trends in every market; they simply need to be identified.
- Have patience
It is important not to be guided by fear, but to look at the numbers and make informed decisions that are governed by logic rather than anticipation. In many cases, as soon as investors see an upturn in prices, they would quickly cash in their profits. Conversely, when they witness a downturn, they would stay in the game to overcome their losses and continue to lose even more.
As mentioned earlier, it is critical to have a stop-loss policy to minimize the risks. While at the same time, pulling out too early can mean parting with potential future profits. Such decisions need to be made basis experience and market learnings so that one can make most of their investments.
- Have a strategy
Something that goes hand-in-hand with the process of studying trends and factors that affect stock and commodities market, is to have a strategy at the onset of investment. Identify and settle on an approach while venturing into the commodities market, and have alternate strategies, a Plan B in case the first one backfires, and a Plan C if that doesn’t work either. This will help enhance the quality of insights, enabling the investor to be flexible while switching gears and trying out something new. This will provide a strong base for future investments and insights that will be extremely helpful while making similar investment decisions.
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