What is Commodity Trading?
Commodity trading is the buying and selling of different commodities and their derivative products. A commodity is any essential agricultural product or a raw resource that may be purchased or sold, such as gold, wheat, or crude oil. Commodities may be used to diversify your asset portfolio if you trade them.
What are Traded in the Commodity Market?
Learn about the many types of commodities accessible for trading before you start trading. Some examples of popular categories are:
- Metals (e.g. industrial metals like copper, aluminium and lead, and precious metals like silver and gold)
- Agricultural (e.g. soya bean, chana, rice, jeera, rubber)
- Energy (e.g. crude oil, natural gas, coal)
Advantages of Commodity Trading
- Inflation Safeguard: Commodities are considered a strong inflation hedge since their prices tend to climb during times of high inflation. This contributes to the preservation of purchasing power parity.
- Diversification: The returns on commodities have a very weak correlation to the returns on other assets. The addition of commodities as a separate asset class to your investment portfolio may help you achieve more diversification.
- Safeguard Against Event Risk - Supply interruptions during an economic crisis, a natural catastrophe or a conflict might cause commodity prices to rise. Commodity trading, on the other hand, may assist you in protecting against loss by leveraging intelligently on price movements. To lock in the input price of raw material, for example, a customer might take a long hedge by purchasing a futures contract based on the commodity price today. Meanwhile, a producer seeking a high sale price may choose for a short hedge by selling a futures contract.
Commodity Exchanges
Learning how to trade on commodity exchanges is the first step you need to take to participate in the Indian commodities market. A commodity exchange is a regulated marketplace that facilitates the buying and selling of various commodities. Traders have the option of trading in futures contracts rather than taking physical delivery of the underlying commodities in their portfolios. A futures contract is an agreement to purchase or sell a certain amount of a commodity at a predetermined price and within a predetermined time frame.
Here are India's national commodities exchanges:
- National Commodity and Derivative Exchange
- Multi Commodity Exchange of India Ltd
- National Stock Exchange
- Indian Commodity Exchange
- Bombay Stock Exchange
Wrapping Up
Many commodities traders in India use futures contracts to trade. Futures contracts are used by businesses to hedge against the prices of commodities that they manage to reduce the risk of financial loss. Speculators also participate in the Indian commodities market.
If trading doesn't appeal to you, consider investing in upcoming IPOs. Whatever you decide, make sure you always have a Demat and trading account in your name. You cannot invest in the financial markets without one. Open a Demat account with Motilal Oswal today in a matter of minutes.
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