A commodity can be said to be a group of assets or goods that we consume every day in our lives. They are very essential for day to day working. Commodity trading includes metals, energy, food, etc. To put it another way, It includes every type of movable item or good which you can purchase or sell, but it does not include actionable claims and money.
Commodity trading started in India even before it did in many countries. Commodity trading in Indian has a great significance and it acts as one of the sources of income for traders. Before you start trading, it is important to learn commodity trading basics. Nifty Trading Academy is one of the leaders in providing training in relation to the stock market and commodity market.
How to Invest in Commodity Markets?
Investing in the Indian commodity market can be done through any of the two exchanges.
The trading on these exchanges can be done via two modes:
- Online Mode: By using the internet, you can purchase or sell commodities from anywhere across the world. In online trading, there is no one to misguide you or neither there is a broker, this lowers the cost of trading.
- Offline Mode: By offline mode, you can trade in commodities by using the advice of the broker and your financial advisor. Through offline mode can place a purchase or sell order just by calling your broker.
The ideal way to invest in commodities is through the futures contract. You can invest through any of the above modes and in any of the above exchanges. If you want to invest in agricultural commodities then you must invest through National commodities derivatives exchange (NCDEX) and for other commodities you invest through Multi Commodity Exchanges (MCX).
As you are now aware of the ways to invest in the commodity market. It is important for you to know the advantages and disadvantages of trading in the commodity market. In this segment of the article, we will see the advantages and disadvantages of trading in commodities
Advantages and Disadvantages of Commodity Trading
Advantages of Trading In Commodities
- The biggest advantage of trading in commodities is that you get high leverage. This means that you can take a position in any of the commodity just by paying a fraction of the total value as a margin. In addition, the margin in the commodity futures market is much lower in comparison to the equity future and options market.
- The commodity market is governed by international price moment. This means that there is very less or no chances of manipulation in the price of any commodity. The prices of the commodity in the Indian market is determined by the price movement of the commodity in the international markets. Therefore, this makes the commodity market much safer and less prone to price manipulation.
- Commodity market size is governed by different supply-demand dynamics and many other factors. This helps the trader in diversifying his trading portfolio. The prices of commodities depend on several factors like geopolitical tension, weather conditions, natural disasters, etc. Each commodity can be said to be an independent asset class and different factors affect each one of it. Therefore, depending upon the conditions, the trader can make a well diversified trading portfolio.
- Commodity markets are volatile and this makes them risky but very rewarding at the same time. The commodity prices can show huge swings which is beneficial for the trader to take any position. Smart commodity trader always takes advantage of these price swings to make higher profits. A planned trading strategy in a commodity can helper the trader in making higher profits.
- Commodity markets are highly liquid in nature. You can easily find buyers and sellers for the commodity you want to trade.
Disadvantages of Trading in Commodities
- Highly volatile markets are good for a commodity trader. But at the same time, these volatile markets can erode the capital of the investor in just a few According to a study, the commodity market is almost two times more volatile than the stock market and four times more volatile than the bond markets. This makes commodity trading very risky for traders.
- There are many examples of commodity market generating very less or no income for many investors.
- The commodity market provides trading at lower margins but this can prove to be fatal in many cases. Lower margin trading can encourage many investors to take excessive risk and big positions. In such scenarios, the chances of making huge losses are more.
The above are the disadvantages of trading in the commodity market in India. Every trader must keep them in mind before trading in commodities
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