Commodity trading is essentially a place where various commodities and their forms are sold and bought. By definition, a commodity is referred to as any raw material or primary agricultural product that is bought and sold, be it gold, grains, crude oil, and many more. Once you engage with commodity trading, these commodities can help you in diversifying your asset portfolio.
What are the various types of commodities?
Before beginning with commodity trading, it is important to know the different types of commodities that are available for trade. Such commodity categories are as follows:
- Energy commodities
Commodities like natural gas, crude oil, coal, etc
- Metal commodities
Industrial metals like copper and lead, aluminium and precious metals like gold and silver.
- Agricultural commodities
Raw materials like chana, soya bean, rubber, jeera, etc.
Commodity Exchanges in India
In order to participate in commodity exchange in India, it is necessary to know how to trade in commodity exchanges. A commodity exchange is referred to as a regulated market where the said trading of commodities takes place. The traders have a choice not to take physical delivery of commodities and instead trade in Futures contracts. A Futures contract is defined as an agreement to sell or buy a fixed amount of commodity at a specified price that is pre-decided and within the stated expiry date.
The national commodity exchanges in India are:
- Bombay Stock Exchange (BSE)
- Indian Commodity Exchange (ICEX)
- National Commodity and Derivative Exchange (NCDEX)
- National Stock Exchange (NSE)
- Multi Commodity Exchange of India Ltd (MCX)
Should you invest in Commodities?
In the end, the conversation comes down to, “should I invest in this?”. The answer would vary from person to person, from a need to a need. Commodity investing is a strategy that is used by sophisticated investors. Before making any traders, you need to carefully understand the commodity price and charts and thorough research has to go in.
Another thing to pay attention to is that while market prices moves can lead to large gains and losses, one needs to have a high-risk tolerance as well. This means that you can stomach short-term losses in pursuit of long-term gains. And if you do invest in commodities, it should ideally be only a portion of your total portfolio.
Financial advisers would ideally suggest going for a commodity is something one can do to diversify one’s profile. Diversifying profiles yield better results and, in the long term, reduce risk. One needs to understand the market before pooling in all their resources. The old adage, in this case, still holds true “never put all the eggs in one basket.”
Amateur and experienced are the types of traders who have a variety of options for investing in financial instruments that give them access to commodity markets. While commodity futures contracts provide the most direct way to participate in the price movement of the industry, there are additional types of investments out there with less risk that also provide sufficient opportunities for commodities exposure.
Basically, commodities are known to be risky investment propositions since they cannot essentially be outright predicted. But with due information and focus, what has been impossible to humanity?