Commodities Trading: How to Invest in Commodity…!!
We all have heard about the trading of stocks, bonds, Golds, and ETF. But commodity trading forms the basic building blocks of the global economy. It’s mainly involving trading of natural resources or agricultural products which are traded on dedicated exchanges throughout the world. It has been happening since ancient times. Rice futures have been traded in China dating 6,000B.C. In India too, commodity trading started way back in time, even before it did in many countries. Only after in the mid-19th century, commodity trading started in entities like the Chicago Board of Exchange. In general, there are mainly four categories of trading commodities, which include:
- Energy: This includes mainly crude oil, heating oil, natural gas, and gasoline.
- Metals: This includes mainly gold, silver, platinum, and copper.
- Agriculture: This includes corn, soybeans, wheat, rice, coffee, cotton, and sugar.
- Livestock: This includes lean hogs, live cattle, and feeder cattle.
But in our country, it happens only in three segments i.e. Energy, Metals and Agriculture. The best way to invest in commodities is through future markets. Future market contracts are one way to buy the product. Traders use these contracts to take a position on a future call, in order to take the benefit of price swing in the future.
A trader can trade in commodities through these six major trading exchanges in India.
- Multi Commodity Exchange (MCX)
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICX)
- National Multi Commodity Exchange (NMCX)
- Ace Derivatives Exchange (ACX)
- Universal Commodity Exchange (UCX)
Let’s look at the benefit of investing in the Commodity future market.
- High leverage. The commodity is traded in the future and that’s why it has high leverage. If anyone takes a position in future, then he/she needs to pay a small price in the form of margin. But it provides less margin compared to the equity future and options.
- Highly Liquid: Commodity futures trade is highly liquid, as the number of buyers/sellers available is quite high.
- Diversification: It offers a range of products to be traded, hence it acts as an effective diversification instrument for the portfolio.
Investing in commodities can quickly degenerate into gambling or speculations when a trader makes uninformed decisions. Investors can use it as a hedge against any volatile prices, geo-political events and combined with limited agriculture supply.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing