The purchasing and selling of common raw materials like grain, bread, oil, and metals are called Commodity Trading. It occasionally involves the exchange of actual raw materials. You could either involve in Options or Futures Contracts, where you agree to purchase or sell a commodity at a specific price at a specific date.
Your portfolio diversifies by adding Derivatives, which also act as an inflation hedge. Commodities, however, are very erratic. Commodity Trading depends on unpredictable factors like weather and politics, which thereby affects the pricing.
What is Commodity Trading?
In India, the most common means of trading commodities is through Derivatives like Commodity Futures and Options. A Commodity Derivative contract derives its value from the commodity that serves as its underlying asset. Instead of finished or processed items, the underlying commodities are raw materials or primary goods like wheat, gold, crude oil, etc. Plenty of commodities, such as barrels of oil, bushels of maize, kilogrammes of wheat, etc., are typically traded.
According to the contract terms, you have two options when the product reaches maturity: either take physical delivery of it or settle in cash. You can also profit from changes in commodity prices without investing directly in Futures or other Derivative products.
Benefits
Protection
When inflation rises, borrowing becomes expensive for businesses, which influences their ability to turn a profit. As a result, during strong inflation, stock prices decline. If the cost of items rises, the price of basic goods and raw materials increases, driving up the price of commodities. Thus, Commodity Trading is advantageous when inflation is on the rise.
Transparency
The current computerised trading suite has increased the market's efficiency and transparency by removing any chances of manipulation. It allows for widespread participation in fair price discovery.
High-leverage facility
Traders can increase their profit potential by investing in the Commodity Market. By paying a 5% to 10% margin, it enables traders to hold a sizeable stake in the market. Even a small price increase can boost profit. Even when the minimum margin requirement for several commodities changes, they are still lower than the margins needed for equity investments. Affordable minimum deposit accounts and regulated contracts also make it beneficial.
Conclusion
Commodity Trading is a high-risk, high-reward activity. It may be a good way to protect your wealth against inflation or a bear market. But you should only consider them if you are well-versed in the dynamics of demand and supply in the Commodity Market. This includes being aware of current events and previous price trends. By minimising your use of margin when you first start, you can lower your risk.
