Oil commodity market refers to physical and virtual buying and selling transaction oil commodities, such as trading in crude oil and oil futures to name a few. Crude oil has a contract value, margin requirements and a ticker symbol like any other commodity in an oil commodity market. You must be aware of these components in order to understand how to use them so that you could calculate your potential profits and loss. For better understanding of these terminologies, you should ask Your Personal Financial Mentor to explain these terms to you and provide sufficient guidelines before making an investment in an oil commodity market.
These commodities trade on margin and margin changes based on the current face value of the contract and market volatility. The amount of margin changes in different market conditions and the amount of leverage provided by oil futures market makes it lucrative for those who are looking to gain exposure through oil prices. Making an investment in companies in the oil commodity market gives you exposure to other sorts of products in the energy industry, such as gasoline, petrol, and liquefied petroleum gas (LPG), kerosene, fuel oil and gas oil.
This is because many oil companies that are trading in an oil commodity market have added other non-petroleum energy sources to their product research mix and hence, are providing great exposure to energy commodities of all types. They are not only processing crude oil into different products, but they also have petrochemical businesses and profitable projects that include natural gas and alternative energy sources. This is the reason why BP changed its name from British Petroleum to Beyond Petroleum. The point of explaining all this is to highlight the fact that by investing in these companies, an investor gain exposure to different products and therefore, is able to achieve diversification and secure better profits. Also, by investing in an oil commodity market an investor gets tax incentive from the government because oil is used in a variety of products, such as plastics, fertilizers and other building materials. It plays a vital role in any economy and an economy will crash without its sufficient supply. Therefore, the government provides tax breaks for investors who invest in an oil commodity market to provide energy and fuel.
On the other hand, derivative securities in the oil commodity market, such as oil futures, give the investor the right to purchase oil at a specific price and are similar to how stock options work. If you exercise these derivatives by the settlement date, you can buy oil at a price mentioned in the oil futures contract. If it is expected that oil price will keep increasing, you can hold the oil futures while its value appreciates and sell it afterwards to an investor who has no intention to exercise it. Hence, it offers you to make substantial profits and also provide great leverage if you do not have enough cash to invest in. Oil futures can be purchased on margins and exchanges set these margin requirements which are often as low as 5% of the total value of investment in oil commodity market. Moreover, it has also introduced an easy trading concept and anyone who has little time to research the process can sort it out and devise a trading strategy.
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Categories: Oil Commodity Market