Investing is probably one of the best ways to strengthen your financial side. It gives you financial leverage, monetary liberty, and security. Besides investing, multiple disciplines have emerged in which people are looking to improve their financial standpoint. And one of them is trading assets, shares, commodities, etc. Trading is a great way to earn a lump sum of money within a short span of time, provided that you are well aware of the risks involved in the act. According to a report, several millionaires have emerged lately because of skillful trading.
Out of various types of trading, commodity trading is a kind of trading where you buy and sell commodities instead of shares and stocks. Commodities are the standard raw materials for manufacturing goods. So, besides being used as raw materials, they can be used as an excellent mode of exchange and trading. But, as delightful as it might seem, it is equally important to be well aware of the risks involved in trading.
Do you want to start online commodity trading without being aware of the benefits and downsides? This article sheds light on commodity trading, its benefits and downsides, and the things that you should be aware of before getting into it.
What is commodity trading and how are they used as a mode of exchange?
Commodity trading, as can be guessed from the name itself, is a type of trading where commodities are used as a means of exchange. There are basically two types of commodities– hard commodities and soft commodities. Hard commodities are the ones that are extracted from the ground within the mining and mineral industries. Soft commodities are cultivated, like livestock, grains, etc.
Similar to any other market, a commodity market is a physical or virtual place where different parties trade and exchange commodities, where the price is determined through the supply and demand chain. Commodities, in a commodity market, are traded both on the spot market and the exchange market. According to the report from NCDEX, the National Commodity Derivatives Exchange, in India, fibres, sugar, cereals, pulses, spices, oils, and oil seeds are mostly used for trading.
Besides that, some precious metals like gold and silver have also been used for commodity trading. These metals are also used as credible investment options in India in the form of ETFs, SGBs, etc.
Now that you know the meaning and significance of commodity trading in India, it is time for you to learn about the benefits of online commodity trading.
What are some of the exclusive benefits of commodity trading?
There are several benefits to trading commodities, and some of them are listed below.
- Immunity to inflation and market crashes:
During a period of rising inflation, the process of borrowing becomes very expensive. During this period of high inflation, stocks fall and businesses struggle to make a profit. However, on the contrary, the cost of goods during this period increases with the increase in raw materials. This makes the prices of commodities rise even higher, and therefore, commodity trading becomes profitable.
- Diversification of portfolio:
Since there are a variety of commodities in which an investor can invest, commodity trading gives you the scope to diversify your portfolio. One of the benchmark benefits that investors seek is portfolio diversification.
- High leverage:
Commodity trading also gives you the benefit of high leverage. You only have to pay about 5 to 10 percent of the margin and still be able to have a good foothold in the market. So, you can still score a good profit if anything like an insignificant price increase occurs.
- High transparency:
Because of the modern rules of the market, online commodity trading is highly transparent. There are no risks of manipulation involved in the trading process, leading to fair price discovery.
What are the downsides of commodity trading in India in 2022?
There are some downsides to commodity trading as well. They are:
All the high returns you avail yourself of from commodity trading are due to the high volatility of the prices of different commodities. So, even if the prices change, the supply and demand chain is unaffected, and this has the potential to alter the future of commodities.
- Short-term goals:
Most of the time, the commodity market trades in the form of contracts. This trading is always carried out for a shorter duration, unlike with stocks, where you can pull the trigger for a longer duration. So, as a short-term trading option, commodity trading is an exceptional option, but it is not idle for accomplishing long-term goals.
- No sharing of ownership:
In stock market investment, you buy shares from companies, and as a result, you share ownership as well. This gives you the power to influence the decisions of the company. However, you don’t have the scope of sharing ownership in commodity trading because you buy individual commodities.
- Low liquidity:
Commodities have lower liquidity than equities because equities can be easily traded at any given price. This helps you manage enough funds in case of a financial crunch or an emergency. But, in the case of commodity trading, this is not quite possible, and sometimes you have to settle for a low price.
Wrapping it up
You should be well aware of all the benefits and drawbacks of any mode of trading or investment. You should have a certain level of experience before you commit to the process of regular trading. As for commodity trading, you should know about the benefits like portfolio diversification, leverage, and transparency. You should also acknowledge the downsides, like volatility, low liquidity, etc. You should do ample research and seek guidance from different investors and traders before getting into online commodity trading. If you want to know more about trading and investment, you can refer to Piramal Finance.