As financial markets continue to evolve, commodity trading has always played a crucial role in the growth and prosperity of economies. Welcome to our blog! Here, we will explore the what is commodity trading, including various trading methods and the benefits it offers.
“Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong.” – John Templeton
List of contents
- What is commodity trading?
- Types of commodities open for trade
- Basics of commodity trading
- Different ways to trade commodities
- Benefits of commodity trading
- Disadvantage
- Conclusion
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What is commodity trading?
Commodity trading involves the buying and selling of commodity futures contracts or options contracts listed on the exchange. Such as agricultural products, metals, and energy resources through a regulated exchange platform.
In India, popular commodity exchanges include MCX (Multi Commodity Exchange) and NCDEX (National Commodity and Derivatives Exchange).
Types of commodities open for trade
There is a wide range of commodities available for trade in the commodity market. Some common types of commodities open for trade include:
Precious metals (Bullion) = gold, silver
Base metals = Aluminum, copper, lead, nickel, and zinc
Energy = crude oil, natural gas
Agriculture products = cotton, menthe oil, etc.
Basics of commodity trading
Timing: The trading hours are from Monday to Friday, 9 a.m. to 11:30 p.m.
Lot and Tick size:
| Commodity | Lot size | Tick size | Profit/Loss for every tick size change | Profit/Loss on a 1 point movement | Nature of settlement | Date of settlement |
|---|---|---|---|---|---|---|
| GOLD | 1 KGS | 1 | 100 | 100 | Complusory Delivery | - |
| GOLDM | 100 GRMS | 1 | 10 | 10 | - | - |
| GOLDGUINEA | 8 GRMS | 1 | 1 | 1 | - | - |
| GOLDPETAL | 1 GRMS | 1 | 1 | 1 | - | - |
| SILVER | 30 KGS | 1 | 30 | 30 | Complusory Delivery | - |
| SILVERM | 5 KGS | 1 | 5 | 5 | - | - |
| SILVERMIC | 1 KGS | 1 | 1 | 1 | - | - |
| SILVERMIC | 1 KGS | 1 | 1 | 1 | - | - |
| CRUDEOIL | 100 BARRELS | 1 | 100 | 100 | Cash settled | - |
| NATURAL GAS | 1250 MMBTU | 0.10 | 125 | 1250 | Cash settled | - |
| ALUMINIUM | 5 MT | 0.05 | 250 | 5000 | Complusory Delivery | 5 trading day before last trading day of month |
| LEAD | 5 MT | 0.05 | 250 | 5000 | Complusory Delivery | 5 trading day before last trading day of month |
| ZINC | 5 MT | 0.05 | 250 | 5000 | Complusory Delivery | 5 trading day before last trading day of month |
| COPPER | 2.5 MT | 0.05 | 125 | 2500 | Complusory Delivery | 5 trading day before last trading day of month |
| NICKLE | 1500 KGS | 0.05 | 75 | 1500 | Complusory Delivery | 5 trading day before last trading day of month |
| MCXMETLDEX | 50 UNIT | 1 | 50 | 50 | - | - |
Different ways to trade commodities
You have multiple ways to trade commodities. Some of these methods include:
- Direct investment: It is a popular way to invest in commodities. With direct investment, investors can directly buy and possess physical commodities like gold bars, silver coins, agricultural products, or energy resources. This method provides direct exposure to the commodities and the potential to benefit from their price changes.
- Futures Trading: Futures trading involves buying or selling contracts that obligate the parties involved to buy or sell a specific quantity of a commodity at a predetermined price and future date. It allows traders to speculate on price movements and manage risks.
- Options Trading: Options trading provides the right, but not the obligation, to buy or sell a commodity at a predetermined price within a specific timeframe. It offers flexibility and allows traders to profit from price movements while limiting potential losses.
- Commodity ETFs: Commodity ETFs (Exchange Traded Funds) provide a simple and accessible way to trade commodities. They follow the performance of specific commodities or commodity indexes. If you want to invest in gold or silver, you can consider gold or silver ETFs.
- Commodity Index Funds: These funds invest in a diverse range of commodities to mirror the performance of a specific commodity index. By investing in these funds, investors can gain exposure to the overall commodity market without needing to trade individual commodities directly.
Benefits of commodity trading
Commodity trading offers two significant benefits: diversification and protection against inflation and geopolitical risks. Here’s a closer look at these advantages:
- Diversification: Diversification is crucial for investing as it reduces risks. Adding commodities to your investment portfolio is a way to achieve diversification. Commodities have a low correlation with stocks and bonds, which means they may behave differently in volatile markets. This can effectively lower the overall risk of your portfolio.
- Inflation safeguard: Commodities are considered a good hedge against inflation as their prices tend to rise during periods of high inflation. This helps protect the value of investments. Moreover, geopolitical events like conflicts or disruptions in global supply chains can affect commodity prices. By investing in commodities, investors have the opportunity to benefit from these price changes and reduce the impact of inflation and geopolitical uncertainties on their portfolio.
Disadvantage
- High leverage: High leverage in commodity trading is a double-edged sword. This magnifies both potential profits and losses. While leverage can offer opportunities for substantial gains, it also poses a greater risk of financial loss.
- Volatility: One potential disadvantage of commodity trading is the inherent volatility and unpredictability of commodity prices.
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Conclusion
We have learned about ‘what is commodity trading’ in this blog. It offers opportunities for diversification and potential gains from price changes. But it carries risks due to volatile commodity prices and high leverage. Traders and investors must manage risks well and stay informed about factors affecting commodity prices.
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