what is commodity trading?

Commodity trading may be a business of buying and selling goods created naturally or individuals for profit. Commodity trading is generally classified into 2 categories: spot trading and futures trading.

Spot trading involves the buying and selling of commodities at this market value on a method of accounting. In distinction, futures trading consists of buying and selling commodities at a preset worth within the future.

Key Points

  • Commodity trading may be a business of buying and selling goods created naturally or individuals for profit.
  • Spot trading involves the buying and selling of commodities at this market value on a method of accounting.
  • Futures trading consists of buying and selling commodities at a preset worth within the future.
  • Advantages and disadvantages of commodity trading
  • Types of commodity trading include commodity futures, physical commodities, and Commodity stocks.

Role of Commodity Trading In India

  • Commodity trading starts in India in the year 1875 and it continues till now with different modifications.
  • In 2015, the  Forward Market Commission (FMC) commodity trading regulatory body merged with SEBI (Securities and Board of India) 
  • Commodity trading in India is quite vital for the country’s economy, investors, and other people counting on commodities for their living. A number of the foremost vital options of the commodity trading markets are:

 

  • Price Discovery

Commodity markets permit individuals to seek out the important prices of different commodities, as well as agricultural products in India.

  • Quality Maintenance

The commodity markets have strict needs regarding the standard of commodities offered for buying and selling.

  • Leverage

Trading in commodity futures relies on leverage through margin maintained with the broker. An enormous transaction may be performed with away the smaller amount of money available.

  • Diversification

Trading in commodity markets in India may be a good way for investors to diversify their portfolios. As commodities have an inverse relationship with bonds and equities, finance in commodities would safeguard the investor cash if alternative markets fall.

 

Advantages and disadvantages of commodity trading

Inflation

  • Inflation may be a terrible word for individuals shopping for physical commodities. However, if you're an internet commodity trader, inflation could be your supporter. Inflation merely means a rise in the costs of commodities. So, if you hold a commodity whose value is increasing, your portfolio price will increase. This ensures that your buying power remains constant even though the rate is at its incomparable high. Stocks and bonds usually witness a fall once inflation rises since inflation typically dries up the liquidity, reducing buying power.

Liquidity

  • Online commodity investments are 100% liquid since you'll sell them anytime, creating them a more robust option than realty or mounted deposits. Like stocks, commodities are simple to buy and straightforward to sell. Hence, commodity derivatives may be a secure bet once you wish for higher authority over your funds.

Disadvantages of commodity Trading

1. Leverage might Quickly withdraw of Hand

Commodity traders usually get higher leverage than stock traders. However, higher leverage may additionally create it tough to manage the urge to over-trading. And if the market goes opposite to your calculations, you'll lose cash against winning it.

2. Excessive Volatility creates Confusion 

Back of the cover calculations suggest that commodities are double as volatile as stocks and 4 times additional volatile than bonds. And, commodities like crude, gold, etc., are more volatile than others. Such huge value swings may cause you to lose focus and play disturbance together with your calculations.

3. Additional Exposed to Economic and Political Factors

Commodity costs rely on numerous economic and political factors. For instance, if crude production will increase, the commodity's value can drop the other way around. Also, throughout the height of the COVID-19 pandemic, crude costs were born to rarely-seen-before levels. Hence, as an internet commodity trader, should lot of aware international political news and value varied political economy knowledge.

 


Types of Commodities Trading

Commodity Futures

  • The most common path to trading in commodities is through a futures contract. Within which the investor agrees with another investor concerning the longer-term value of the commodity.
  • Investors have to be compelled to establish a specialty broker account to take a position in futures trading that allows future and options trades. Whenever you open or shut an edge, the nondepository financial institution charges a commission on future commodities.

Physical commodity

  • In futures contracts, investors don't seem to be buying or selling the real commodity itself. Instead, they're merely depending on the price changes. However, once it involves precious metals like gold, silver, etc, investors will possess it within the kind of jewelry, gold coins, or bars.
  • While these trades permit you to feel the particular weight of your investments, precious metals are associated with higher transactional prices than other investment options. Finance in physical commodities is explicitly sensible if there are worth-dense commodities concerned. Even then, investors have to be pushed to pay high markups on high of the price offered within the retail market.

Commodities Stocks

  • Another way to change commodities is to shop for the company's stock that deals therein specific commodities. For instance, if you want to take a position in oil, you'll purchase the stocks of an oil refinement company. The approach this works is that the stocks of those corporations follow the worth of the particular Commodity on paper, once oil value sees a spike, a company ought to be profitable also. As a result, its stock value ought to go up too.

Conclusion

Investing in stocks is a smaller amount risky than finance directly within the commodity as a result you're not dissipating your entire cash on one commodity value. A well-established company may still create profits albeit the worth of the commodity goes down
As an investment strategy, commodity trading is best suited to stable investors. Since the shifts in commodity costs will cause large profits or losses, investors have to be compelled to have a high craving for risk. 

FAQS

What are the minimum requirements for commodity trading?

  • One should need a Demat account to trade in stocks, to trade in commodities. While there are multiple brokerage houses where one can open an account, it's essential to opt for a reputed firm that provides key recommendations regarding trade.

Which commodity is good for trading?

The Best five Commodities to exchange India in 2022

  • Crude Oil. 
  • Aluminum.
  • Copper.
  • Natural Gas.
  • Gold.