of us are extremely fluent in the understanding of a commodity, which is a
collective organization of a good or that are crucial in the everyday working
of our lives and pose an effect on our routine, for instance, food, metal, oil,
etc. so, to translate the same in a financial term, a commodity is deemed as
anything that is fit for sale and buying purpose and is movable by nature,
except, of course, money and actionable claims.
procedure of dealing in this buying and selling of these movable goods is known
as commodities trading. Commodity trading dates back to centuries ago when it
first started and continues to maintain its importance in today’s deal market,
despite the monopoly shared by the stock market and share markets.
commodities market is driven by the first law of economics which is based on
supply and demand. A change of graph in supply poses an effect on the said
demand of the commodity, thereby fluctuating the commodities market. Thus, any
disturbance in the environment, cultural sector, technological sector, and
economical sector of a country directly impacts the trading of commodities.
What are the types of commodities for
speaking, commodities are classified into four categories that undergo trading
behavior. These are:
? Metals: Precious metals as gold, silver, copper, and
platinum form the palette for metal commodities. During a boom in markets, the
investors may be lured to invest their resources in some precious and costly
metals, like Gold, which further leads to yielding profitable returns owing to
their status structure, their reliability, and their conveyable value in the
market. This investment may also arise as a shield against currency devaluation
or periods of inflation, resulting in optimum results even then.
? Energy: The real gems of the investment market namely,
crude oil, heating oil, natural gas, and gasoline belong to this section of
commodities. This is a rather significant section of the commodity markets as
the demand for energy products is always going to soar high in the sky,
especially with the economic developments all around the globe, leading to
skyrocketed price hike of them. However, interested groups of investors should
always have a thorough peek of knowledge related to OPEC (Organization of the
Petroleum Exporting Countries) and new advancements in the field to carry on a
positive streak of investment.
? Agriculture: The benefits of quality agriculture is not
limited to health but is also extended to wealth. Agricultural products such as
wheat, rice, cotton, sugar, corn, coffee, etc are known to be extremely
volatile during the transformation of weather and hence pose an investment
opportunity accordingly. The mantra behind agricultural investment is
dependable on the fact that a bigger population in association with the limited
supply of agricultural products, tends to yield returns.
? Livestock and Meat: Commodities that deal in flesh and bones of
other consumable animals, like pork bellies, chicken, etc.
various equity investments, the exercising body of control for commodities trading
Stock Exchange Board of India (SEBI) after the successful merger of Forward Market
Commission (FMC) in it. Under SEBI, there are six potent commodity exchanges
present in our country. These are:
? The Universal Commodity
? National Multi
Commodity Exchange (NMCE)
? Ace Derivatives
? Multi Commodity
? Indian Commodity
? National Commodity and
Derivatives Exchange (NCDEX)
Steps to trade in Commodities.
? Choose your market: The first step in commodities trading is to
choose the sector or type of commodity you are interested to invest in.
? Buying or Selling: The investors, after attaining a thorough
knowledge of the commodities along with other factors that might pose an
influence on the market of said commodities, decide whether they wish to buy a
commodity and keep investing in it, or they wish to sell the commodity.
? Decide on the size of the trade: Before beginning with
an investment portfolio, make sure you are aware of the size of the trade that
you wish to indulge in.
? Meet your risk: The investors in commodities trading are
presented with a range of stop loss orders to choose their degree of risk,
along with guaranteed stop loss orders. In this format, the traders are
guaranteed to take away a specified price at the closing of the trade,
regardless of the condition of the market. However, this special advantage of
Guaranteed Stop Loss Orders is distributed at a premium price.
? Keep a track of your position: Once you commensurate
your trade, make sure to keep a clear track of your commodity and its position
to estimate real-time profit and loss.
Investment in Commodities
futures contract is one of the best methods to invest in commodities trading.
Like currency futures trading in India, commodities futures trading is a stated agreement that
provides the right to an individual to buy or sell a certain quantity of goods
at a fixed amount, somewhere in the future, as fixed. Futures trading is a
method that is available on every set of commodities and acts as protection
that cushions any price shock that may arise at any time.
Difference between commodity trading and
of the most dynamic investment sections of financial markets are equity and
commodities trading. While one facilitates the returns from a company listed on
the exchange, the other pours in returns from the transactions on everyday
goods. Some of the other points of difference between the two are:
? Freedom of Ownership: The investors dealing in equity trading
are entitled to a share of the ownership of the company in action. Whereas,
this is not true for commodity trading. The commodity investors do not own an
ownership right as part of their trading.
? Length of trade: Commodities trading is suitable for investors
who are looking for short term investment as the contract for commodity trading
carries an expiry date. As opposed to this, the equities are usually for
investors wishing to have a long term investment portfolio as they do not carry
a contract of expiration.
? Hours of Trading: Commodities trading takes a longer duration to
trade in comparison to equity trading.
? Bid-ask spread: The word for measuring the level of liquidity,
is lower for stocks as compared to commodities trading. This means the highest
amount that a buyer is ready to spend on buying the stock is higher than the
lowest amount the seller is ready to accept.
? Margin Requirement: This is lower for commodity trading as opposed
to equity trading.
these may be strong points of difference between equity and commodities
trading, the rate of interest is a key similarity between both. Both these
instruments of the financial market are affected by the prevailing rate of
interest in the market.
new and experienced investors have a plethora of options to invest their
resources, each yielding different returns, in different periods of time, and
carrying different tags of risks. Though commodities trading is one of the
finest methods of investment, allowing the users to directly take part in the
financial movement of the economy, they are prone to a higher degree of risk
arising from the uncertainties of the market due to disasters, pandemic,
weather conditions, and more. For those who have a lesser thick skin to risk,
there are several other investment types available to yield good returns.