Risks of Trading in Commodity Futuers(part-1)

What are risks of trading in commodity futures?

(Nidhi Nath Sriniwas)

AS an individual investor, are you worried about sharks preying on hapless minnows in the commodity markets? That isn't surprising.

The Left parties, Soma Gandhi, and even Lok Sabha MPs have expressed the view that futures should be banned or else severely curtailed because of high chances there could allegedly be price manipulation. Unscrupulous traders, betting cartels, and sharks from the equity markets seeking fresh prey in commodity futures. Part of their apprehension is simply because they don't really understand how commodity exchanges are structured and the checks and balances that technology has made possible. It's easy to demonise anything that you don’t understand. That is why the government has not taken their views too seriously. It understands the value of commodity futures in price stability.

But as a small investor, your concerns are far more immediate. Even a 10% chance of getting scalped is too high a risk.

What's more, unlike business losses, it much harder to forgive and forget? So, it’s time to figure out what really are the chances that your money will remain safe from sharpshooters in the commodity wild west.

Let me tell you the tough facts first. You can lose your shirt even when everyone is playing by the rules. And despite what the red brigade says, most people do play by the rules.
The problem lies in the very nature of commodity futures.

The commodity trading world is dominated by professionals. There are three kinds. All the big companies have special trading desks manned by MBAs and finance whiz kids who can spot opportunity in a technical graph that looks like something you last admired when your kid was three years old. They spend their days bending minds around fundamentals, shorts, longs and basis. Sure, you can compete but it means quitting your day job.

The big companies are outnumbered by traditional traders (or the "lalaji types") and brokers in the physical markets like Naya Bazaar and Jhaveri Bazaar. Sitting on their pan masala -stained gaddis, the Hasmukhbhai Shahs and Chaganmal Chhajju Lal Jains have been dealing - buying, selling, processing - a commodity for decades. Jewellers, besan chakki owners and metal traders are classic examples.