Pros and Cons of Commodity Trading
Online commodity trading has emerged as a potential alternative to capital market investments. Standardized contracts and other investment vehicles in commodity trading. Unlike equities stocks, commodities trade through spot, futures, and options contracts. Any change in the supply of goods can cause the market to rise quickly.
Some benefits of investing in the commodity market are less volatility. Protection against inflation or geopolitical crises, diversification, and so on. Some problems with trading on the commodity market are high leverage, a greater reliance on macroeconomic factors, etc.
The next parts discuss these elements to help you make the best decision while trading commodities online. But before we talk more about the pros and cons of commodity investment trading, let’s figure out what “commodity trading” means.
What is Commodity Trading?
Commodity Trading refers to metal, energy, food (cocoa, rice), and the like. It is commodity trading when these commodities trade hands through commodity exchange. In India, MCX and NCDEX regulate and control commodity market transactions. You need a Demat account and trading account to trade a commodity online.
Let us now look at the benefits of Commodity investment trading.
History of Commodity Trading
Commodity investment trading is not new. The history goes back a long time. When people used to swap a good for another, the practice was a barter system. With the advancement of humans and the evolution of currencies, traders purchased commodities.
Now, the exchange of commodities is still carried out throughout the world. Special Commodity investment exchanges have been set up. It is to look after the trade of commodities which functions as stock exchanges.
Characteristics of Commodity Markets
Like all other financial markets, the Commodity investment market runs on the basic premise of Demand and Supply. Any adjustment in the supply pattern will impact demand and vice versa. If the demand is great and the supply is low, the prices will shoot, and prices will plummet in the case of low demand. Any disturbance in the supply of commodities, such as droughts and floods. Which might impair the supply of agriculture can lead to a rapid increase in the market.
The advancement in technology and economic development also affects the Commodity investment markets. India has emerged as a big production participant with a higher volume of industrial metals. This will lead to a shortage in the supply of such industrial metals for the rest of the globe.
The Top Advantages of Commodity Market Trading
Facilitates Diversification
21st-century investors are more knowledgeable. They know the different benefits of diversification. If you are not familiar with the term diversification, here’s one line to clarify. Diversification splits your wealth over many financial assets. It eventually decreases risks and enhances profits.
Commodity investment trading online allows you to diversify your investments. It also reduces the risk of financial loss. Commodities and stocks or bonds typically move in opposite directions. Assume two countries are involved in a conflict. In that circumstance, investors may become concerned and withdraw funds from stocks or bonds to invest in commodities such as gold or silver.
If the economy does well, and corporations prove a strong surge in earnings, investors might dump gold or silver and switch to shares. Hence, the presence of commodities in your portfolio might assist you in hedging your risks to maximize the returns.
Inflation
Inflation is a terrible term for individuals buying physical commodities. But, if you are an online commodity trader, inflation might be your best friend. Inflation means an increase in the prices of commodities. So, if you hold a Commodity investment whose price increases, your portfolio value will likewise increase. This ensures that your purchasing power remains the same even if the inflation rate is at its all-time high.
Stocks and bonds generally witness a fall when inflation rises. This is because inflation often dries up liquidity, reducing purchasing power.
Liquidity
Online commodity investments are 100% liquid since you can sell them anytime. It can help you make them a better option than real estate or fixed deposits. Like stocks, commodities are easy to buy and easy to sell. Hence, commodity derivatives can be a safe bet when you want better authority over your funds.
We hope now you know the benefits of commodity market investment. Let us go through the disadvantages of Commodity Training.
The Disadvantages of Commodity Market Trading
Leverage May Go Out of Hand
Online Commodity investment traders get higher leverage than stock traders. But, higher leverage may also make it difficult to control the urge to overtrade. And if the market goes opposite to your calculations, you may lose money against winning it.
Excessive Volatility Might Confuse You
Back-of-the-envelope calculations suggest that commodities are twice as volatile as stocks. It is also four times more volatile than bonds. And commodities such as crude oil, gold, etc., are more volatile than others. Such large price swings might make you lose focus and play havoc with your calculations.
More Exposed to Economic and Geopolitical Factors
Commodity investment prices depend on various economic and geopolitical factors. For example, if crude oil production increases, the commodity’s price will drop. During the peak of the COVID-19 pandemic, crude oil prices dropped low.
Should You Invest In Commodities?
Online commodity trading might provide you with an entirely new route. Commodity trading is frequently regarded as more trustworthy than equity market trading. However, investors with stocks and sectors believe that equities stocks are more profitable. They also find it easy to understand.
Conclusion:
Hence, whether to invest in a Commodity investment or not must be your risk-taking ability. Emotions must not govern it. 5 paisa is the preferred broker of people willing to experience low-cost brokerage and precisive order execution. Click here to learn more on our Piramal Housing Finance website.