Trading volume on the stock market and exchanges has surged. This is consistent with the country’s multifold expansion in the number of Demat accounts, which is evidence of people trading in stocks and other assets. India’s stock market now ranks first among the ten most popular stock markets in the world, thanks to the recent infusion of capital.
After all of this discussion about equities being the “go-to” asset for investors, it should be noted that commodity trading has gained substantial traction with Indian investors. Trading in commodities refers to the exchange of a collection of assets or items, & it still occupies a huge place in the Indian financial sector. The things we utilise daily are examples of such assets and goods. They include gas, coal, gold, coffee, & silver. Commodity trading is buying and selling these things to make money.
About trading in Commodities
Commodity trading is a smart approach for investors to diversify their investment holdings. Derivatives trading on the stock market and exchanges is related to the idea of commodities trading. Financial securities known as derivatives are those whose values & prices are substantially from underlying assets. These assets may include securities like stocks, money, bonds, & commodities. Trading in commodities is used by investors & traders as a defence against inflation and its repercussions since the prices of commodities fluctuate and move differently from stock prices. Contrary to appearances, the idea of commodity trade is not new. Technically, commodity trading has been practised since the dawn of time. This is because simple trade and bartering of items have been the norm for many years.
To generate a profit or increase the value of their assets, merchants have traditionally engaged in the trade of products. Additionally, the phrase “profit margin” has been used for centuries in commerce. However, with the development of the stock market and exchanges, also their ongoing progress, commodity trading has evolved into a more formalised form of selling and purchasing. Previously, people could buy commodities & hold them physically, but today, they are trading on exchanges.
You must create a commodity trading account to trade in commodities. This is a trading account with a Demat account attached. Your trading activity is facilitated by a trading account, & buy/sell orders may only be transacted with such an account. A Demat account stores your commodities electronically. A Demat account stocks your assets because commodity trading & investing are done often with the long term in mind. Both of these accounts quickly and simply at any reputable Indian broker. Additionally, opening both accounts is a quick and easy online process that doesn’t require a lot of paperwork or your time or effort. A broker is a DP, or depository participant, who is authorised to trade on behalf of investors in commodities markets.
How does Commodity Trading work?
Commodities can be purchased and sold online in a manner akin to stock and share trading. Choosing the commodity you want to trade in should be your first step in the trading commodities process. Individuals may consider several materials depending on their financial needs and aspirations. Consider gold exchange-traded funds, for instance, if you want to trade and invest in gold (ETFs). At some time in the future, you can purchase the commodity you need at a low-priced & sell it when it rises. Thus, you profit from it. Investors who trade commodities may also use futures contracts. These are agreements between investors to buy or sell a specific amount of a commodity at a fixed price in the future. These futures and options contracts are helpful as a risk hedge.
Even now, the worldwide and large-scale trading of commodities is still going on. As exchanges and derivatives markets have emerged, things have become more complex. Trade controls & standardises the exchange of commodities, enabling effective and liquid markets.
Thanks to commodities markets, producers and consumers of commodity items have access to them in a centralised, liquid market. These market actors can use commodity derivatives to guarantee future supply or demand. Speculators, investors, and arbitrageurs all take an active role in these markets.
A variety of commodities, including precious metals, can be utilised as an alternative asset class to diversify a portfolio. Commodities like these have historically been viewed as excellent inflation hedges. Since the prices of commodities constantly vary in contrast to those of stocks, some investors also gravitate to them during times of market instability.
In the past, trading in commodities was mostly the purview of professional traders and required a significant investment of time, money, and expertise. Today, there are more options for trading commodities.
Energy commodities, metals and nonmetals, and agricultural goods are three categories into which materials may be divided based on their uses. Coal & oil are two examples of energy commodities, whereas Tin & copper are a few instances of both metal and nonmetal commodities. Rice & sugar are two examples of agricultural commodities. Both cash & futures are used in the trading of commodities. But, futures trading is the most popular method of commodities trading.
Benefits of Commodity Trading –
When you create a commodities trading account connected to a Demat account, you may gain much from trading in this way. Investors looking to increase their financial resources should consider commodities trading a great channel. The following are some benefits of trading commodities, whether doing so on the MCX or any other exchange:
- A financial portfolio must be diversified so that assets are distributed evenly for it to be balanced and consider possible risks. Trading in commodities is a great strategy to diversify asset allocation and lower risk in a portfolio.
- Price movements that are global in scope often control the stock market and exchanges. This prevents the possibility of any internal pricing manipulation.
- Commodity prices may prove to be an effective inflation hedge. Contrary to other forms of investment, the movement of commodity prices is identical to that of inflation. This is because rising commodity prices are what ultimately produce inflation. As a result, commodity prices are in some ways predictable. Additionally, gains may be made through rising commodity prices during times of high inflation in the country.