Commodities can be a terrific tool for any investor to diversify and expand their portfolio beyond conventional stocks and debentures. Commodity prices frequently move in the opposite direction of typical securities’ pricing. They are a great hedge during times of market volatility because of this quality. There are two categories of commodities: soft commodities and hard commodities.
- Soft commodities: Products from the agriculture sector such wheat, rice, sugar, corn, and soybeans lie in this category.
- Hard commodities: These include minerals, metals, oil, gas, and other items that are typically mined.
Any of these commodities are now available for trading. Agro commodities trading, however, can be the best option if you’re a trader trying to make a lot of money. You can reach out to PL Global Impex Pte Ltd will make everything possible and guide you throughout the whole process. Futures contracts enable the trade of agro commodities.
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Understanding commodities:
Any necessary product, whether agricultural or not, that may be exchanged or traded is referred to as a commodity. Commodities in India are separated into two groups: soft commodities and hard commodities. While hard commodities are commonly mined, soft commodities are agricultural goods like sugar, wheat, rice, soyabean, corn, etc. For instance, hard commodities include minerals, oil, and so forth.
Agro Commodity Trading: The History and the Present
India’s economy is mainly based on agriculture, which allows the trading of agro commodities a lot of room to grow. Agro-commodity trading began in India in 1875 with the formation of the Cotton Trade Association. 1952 saw the suspension of futures trading due to a lack of goods for domestic use. In 2002, trade in agro commodities took on its contemporary shape. In 2017, SEBI only permitted regular Demat accounts to be used for trading in agro commodities.
Agriculture accounts for over 12% of the commodities trade. Not all agricultural products are traded as agro commodities. Speculating on the prices of agro commodities, which are typically cash crops like pulses, cereals, oilseeds, rubber, fibres like cotton and jute, dry fruits, etc., can be profitable for traders.
FMC
The Forward Market Commission (FMC), which was established in the early 1950s, oversees the agricultural commodity trading markets. Later, in September 2015, FMC and SEBI amalgamated to create a single financial authority to oversee the industry. Since then, SEBI has undertaken numerous steps to increase the trade of Agro commodities in India.
- Introducing commodity options trading,
- Letting brokers participate in commodity trading
- Allowing some FII categories (Foreign Institutional Investors)
- Approving the introduction of commodities trading on the respective trading platforms of the NSE and BSE
Types of Commodities Trading
There are several ways that traders might include commodities in their portfolios, each with pros and cons.
Commodity Futures
Trading commodities through a futures contract is the most popular method. In which the investor and another investor reach an understanding regarding the commodity’s future price.
To invest in futures trading that enables future and options trades, investors must set up a speciality broker account. The brokerage company charges a commodity future trading commission each time you open or close a position.
Physical Commodity
When trading futures contracts, investors do not directly buy or sell the commodity. They are essentially betting on price alterations instead. When it comes to precious metals like gold, silver, and platinum, investors can and do own the physical asset in the form of jewellery, gold coins, or bars.
The transaction costs for precious metals are higher than those of other investment options, even though you might feel the weight of your money during these exchanges. Investing in physical commodities is only feasible when value-dense commodities are there. However, PL Global Impex Pte Ltd thinks that the investors must also pay significant markups on top of the spot price that is available in the retail market.
Commodities Stocks
Purchasing the shares of the business that deals in that specific commodity are another approach to trade in commodities. You could, for instance, invest in oil by purchasing the stock of an organization that refines oil. The way this works is that the stock prices of these companies reflect the price of the underlying commodity. Theoretically, an oil company ought to be successful whenever the price of oil increases. As a result, its stock price ought to increase as well.
Because you are not staking all of your money on one commodity price, investing in stocks is less hazardous than investing directly in the commodity. Even though the price of the item is declining, a well-established business can still turn a profit.
But anything could happen in the end. Although an oil company’s stock price may profit from higher oil prices, internal management and overall market share are crucial aspects. Purchasing firm stocks would not be the best course of action for an investor who wants to closely monitor the price of a commodity.
Read This – Commodity Market: Why Are Commodities So Low?
Understanding trading in agricultural commodities:
To begin trading in agricultural commodities, use a futures contract. Simply put, this is an agreement to buy or sell a specific amount of a certain agricultural product at fixed rates at a later period. Through Exchange Traded Funds (ETFs) and Exchange Traded Notes, you can also take part in the fluctuations of agricultural commodities (ETNs).
Benefits of trading in agricultural commodities:
- By serving as a link between future and spot prices, commodity trading assists in stabilizing the price of agricultural products. Future and spot prices are directly correlated, and hedging can reduce the risks brought on by extreme price swings. Stable pricing benefits producers and farmers while reducing seasonal price variations.
- Trading in agricultural commodities facilitates the creation of efficient hedging and speculation strategies. For instance, if future prices dramatically change as a result of current spot pricing, an efficient hedging strategy should be available. On the other hand, an effective speculative strategy can be formed if variations in future prices have an impact on current spot prices. Thus, it enables the determination of future prices based on the market’s existing tendencies.
- Trading in agricultural commodities can help determine an exact, market-based price for agricultural commodities. This is important because there can occasionally be a difference between the wholesale market prices by farmers and the Minimum Support Price (MSP) that the government has set.
Trading in agro commodities gives both individual and institutional investors the chance to diversify their portfolios. Commodity trading is now as simple as trading traditional equities and securities. All you have to do is open a trading account and a Demat account, then follow the necessary procedures. Industry experts; PL Global Impex Pte Ltd advise considering seasonal and weather-related elements, supply and demand-based factors, and other considerations when investing in agricultural commodities to get the maximum return.
How to Trade in Agro Commodities
Anyone who desires to begin investing in agro commodities might start by learning more about a particular product and making price predictions. You can proceed and pay the margin amount to your broker and buy a futures contract of the commodity you have identified once you are certain of your future price assessment and have narrowed down the commodities you wish to invest in. The sale will take place on the futures contract’s specified date.
Agro-commodity trading involves the same risk as stock trading. Before placing wagers in the market, traders interested in trading agro commodities should be aware of the market risk. The majority of the information is available online, and popular risk-reduction techniques like stop losses and options trading can be useful. Additionally, keep in mind that brokers frequently permit significant leverage when it comes to commodity trading. You should therefore be aware of the rewards and hazards relating to the commodities you deal in.
The Bottom Line
Commodity trading is best suited as an investment option for experienced investors. Investors must have a high tolerance for risk because changes in commodity prices have the potential to produce enormous gains or losses. They must be comfortable accepting temporary setbacks in the light of long-term advantages.
Even if they choose to trade in commodities, they should only commit a part of their whole portfolio to this. Investors who want to diversify typically devote 20% or less of their portfolio to an asset class with a higher risk/reward ratio. This is the area where commodity trading takes off.
