Benefits of Commodity Trading?
Commodities can be basically anything – they can be agricultural products like wheat or rice, metals like gold or silver, and energy like natural gas or coal.
Commodity trading is where these commodities are bought and sold. While trading these commodities, you can exchange them with others, thereby increasing your asset portfolio.
Types of Commodities
Before knowing about this trading, let us know about their types which can be broadly three types,
- Agricultural (soya, chana, rice, rubber, or jeera)
- Metals (aluminum, copper, lead, gold, or silver)
- Energy (natural gas, crude oil, or coal)
Commodity Exchanges
The commodity exchange is a regulated market where the exchange of the commodity takes place. Most of the trading is dealt with in the form of contracts where the amount of commodity and the cost of the commodity are pre-decided in the contract. These are some of the most popular commodity exchanges in India,
- Multi Commodity Exchange of India Ltd (MCX)
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICEX)
- National Stock Exchange (NSE)
- Bombay Stock Exchange (BSE)
Benefits of Trading Commodities
- Protection against Inflation
With the rise of people’s demands, the price touches sky-high. In such an environment, the interest rates will rise due to the high borrowing. If the situation prevails, the economy may at some point in time become crippled. This also reduces the business profits as investments become very less. The cost of production gradually increases and therefore, the price of final products also increases. So, the investors flee to other markets from their places to escape the effects of inflation.
- Saviour under Risky Political Events
Geopolitical events are constantly changing. Wars, famines, accidents or cyclones anything can change the whole global scenario. In these cases, the supply chain gets disrupted and distribution becomes difficult. There would be action and also a scarcity of resources. In this case, the cost of production becomes higher and as a result, the prices of the commodities also shoot up. Here investing in commodities can only help in replacing losses with profits.
- High Leverage Facility
Commodity derivatives always provide a greater amount of leverage. You can manage a big position by adding just 5 to 10 % of the contract value.
Insignificant moves in prices can change the results, like changing the exponential gains. The minimum margin for the may vary but is really lower than that of stocks.
- Diversification
Commodities are usually products that are converted into finished products. These are negatively correlated to the stocks. Rising commodity prices would increase the processing cost, thereby increasing the end cost of the products. Inflation occurs disrupting the supply chain. Stocks do well when inflation is stable and raise abnormal values under unstable inflation. Whenever the stock prices go down, the incurred losses can be adjusted against the gains attained by the community derivatives.
- Transparency
Compared to the ancient trade practices, the contemporary ones are usually made up of a lot of transparency. We have a lot of technologies that can help you in the transparency of the business process. The best example would be blockchain technology or the internet of things (IoT) which can really help you in the decentralization of the whole process, thereby facilitating increased transparency in business operations.
The benefits of commodity trading make one realize how important this trading is for the sustainability and stability of the global market.