Products or product like food, Gold, Silver and other metals, energy are called commodities. They things we use in our daily lives and are tradable in nature. Hence, commodities will be bought and oversubscribed freely. The four main kinds of commodities square measure as follows:
Metals like copper, gold, silver, and noble metal.
Energy like gas, heating gas, crude oil, and gasoline forms.
Agriculture like cocoa, wheat, rice, and ragi, etc.
Livestock and meat like kine and eggs, etc.
Since times of yore, trade goods trading has been happening in Asian country. However, as a results of poor government policies, foreign invasions, and fragmented markets, it somewhat reduced in its quality. With the introduction of securities market exchanges like NCDEX and MCX commodity trading in Asian country regained a number of its significance and recognition.
Advantages of Commodity Trading
Online commodity trading comes with several pros.They are as follows:
Protection against inflation
With the rise in demand for goods and services, a rise within the worth of products themselves, also because the commodities that compose their stuff. during this environment, interest rates increase, that thereby will increase the price of borrowing also as afterwards reducing the net financial gain of the corporate. A visit the income of the corporate may have an effect on the profits that are shared amongst shareholders.
Hence, throughout inflation, the stock costs within the market drop. In distinction, the value of commodities that are needed within the producing of finished product will well rise because it is seeing a growth in demand. Ultimately, the inflation of final goods that are inflated are correlated with the price of the commodities that created them. Hence, investors flee hightail it to commodity futures so that they will defend their capital from the impact of inflation whereas maintaining their worth.
Hedge against political tensions
Another hedge that commodities offer investors is against politics tensions. Any politics event like riots, wars, or conflict will instantly disrupt the availability chain that ends up in a inadequacy of resources. It becomes quite tough to not solely procure however conjointly transfer one’s product. A commodity online should have a physical counterpart that will be bought and sold by the investor. The raw materials which will be transferred and produced into finished product are disrupted in their supply chain as a results of geopolitical tension.
Due to the supply and demand mismatch, the costs of commodities will rise exponentially. In these events, there’s robust pessimism within the market that causes stock prices to fall drastically. {this is|this is often|this will be} also why investing in commodities can aid in stemming losses that one sees in one investment portfolio.
Facility for high leverage
Futures, options, and other commodities derivatives provide an exceptionally high quantity of leverage. you’ve got the option to simply management a large position by paying solely regarding five-hitter or 100% of the contract value as associate degree upfront margin. Any move within the costs of commodities on-line that’s thought-about insignificant may end up in gains that square measure exponential. Therefore, margin trading creates the chance to garner large returns with the help of leverage in on-line commodity trading. The minimum quantity of margin necessary for trading commodity futures would possibly vary however it’s a great deal less than that for stocks. as an example, you’re only required to put about 23/5 of the total worth of the trade as your initial margin for trading wheat futures.
Disadvantages of Commodity Trading
Commodity trading could be a double-edged sword, like most securities market instruments. a number of its cons are as follows:
Leverage
That’s right. Leverage will be an excellent issue, however also a terrible one. In short, it will assist you in controlling an enormous position with very little capital upfront. If your initial margin demand is five-hitter, then you’ve got the opportunity to shop for commodity futures worth ₹1,00,000 for just ₹5000. Even a small change within the worth of your contract can then have a large impact on your losses or gains. If the value were to fall by as very little as ₹10, you can instantly lose₹10,000, since the lot size is 100 with 1000 contracts being purchased. Low margin necessities conjointly encourage associate degree excessive quantity of risk, which might wipe out your entire investment.
Volatility
Prices of commodities square measure quite volatile and trust powerfully on provide and demand factors. each the availability also because the demand for commodities square measure elastic in worth. associate degree physical property in worth means whereas these costs might increase or decrease, the availability of the trade goods remains unchanged. As associate degree example, contemplate the actual fact that if one were to extend trade goods production by growing new crops, extracting iron from deposits of iron ores underground, or extract gas, this may need a copious quantity of your time. All a similar, as commodities square measure pre-requisites to our daily lives, worth changes can on the face of it not have an effect on their demand since they’re essential commodities, and shoppers square measure habituated to them, thereby preventing them from staring at different suggests that.
Not diversification friendly
The typical thought is that there’s an occasional to a correlational statistics between the costs of stocks and people of commodities. As explained earlier, once stock costs square measure tumbling, trade goods costs regarding shoot skyward. However, this theory or assumption failed to hold true throughout the 2008 money crisis, once the costs of commodities like gas and oil fell drastically together with stocks. within the money crisis that ensued in 2008, there was a visit the demand for commodities that resulted in large-scale state, that any halted production.
The Bottom Line
Trading commodities could be a profitable investment choice that may assist you grow your wealth, however keep in mind that it comes with its set of rules and regulations. commodity trading provides you the choice to leverage your gains however it may leverage losses if you’re not careful enough. because of the high volatility, commodities provide far better returns, however they’re not diversification friendly. Hence, it’s vital to be adequately prepared with one’s portfolio and analysis before jumping into the planet of on-line commodity trading.