Risks Involved in the Commodity market

Commodity market is the fastest growing market over the worldwide. Lot of option & opportunities are there to invest in agricultural products, minerals and metals As commodity market leads to huge profit return but it involves a lot of risk, so certain strategy has to be adopted to minimize the risk in order to maintain your profit return. Uncertainties in future market may also led to commodity risk. So lets us have looked over some common type of risk involved in commodity market.

1. Price Risk - Price risk occur due to the adverse movement in world prices and exchange rates.

2. Cost Risk - Input price risk

3. Political Risk

Participants that affected by the risk

1.Producers – Farmers, plantation companies & mining companies face price & cost risk based on the input produced.

2. Buyers – Commercial traders and cooperatives face price risk between the times up to which the country is buying or selling.

3. Exporter – Exporters also face the price risk between the purchasing & selling at the port to the destination market.

4. Government – Government face both price and quantity risk with the regard of tax revenue generally this occur due to the rise of commodity prices.

Apart from these risks there are certain more factors which affect the commodity market. The uneven weather changes may affect the productivity which in turn affects the rise in price. Political instability is another factor of rising of commodity price, fluctatution in exchange rate may also leads to huge loss for investors.

So to minimize such type of risk various options are there to minimize such risk among them stop loss and stop-limit order is most popular.

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