P L G L O B A L

Commodities

Commodities are items or goods that we use on a daily basis, for example, metals, food, and electricity. Most importantly, they are natural resources that are used by businesses and individuals. Also, they are tradable.

Types of commodities

Commodities come in a variety of shapes and sizes.

And, they are currently divided into four major categories.

1.Spicesgrainspulses, oil, and oilseeds are all examples of agriculture.

2.Silver, platinum, and gold are the most common metals.

3.Natural gas, Brent crude, crude oil, and thermal coal are all sources of energy.

4.Meat and livestock: Eggs, feeder cattle.

Learning the different types of commodities available and acquiring industry awareness allows an investor to make informed investment decisions.

Commodities to trade based on the following types :

  • Their total amount of trade
  • Availability of liquid assets
  • Effects of supply and demand
  • The commodity’s total price movement.

Benefit of trading in commodities

Protection from inflation

If demand for goods and services grows, the prices of raw materials (commodity) rises. However, it results in rising in the price of such goods and services.

Interest rates rise in an inflationary setting.Hence, it increases the cost of borrowing. As a result, it reduces the company’s net profits. Furthermore, a drop in the company’s revenue has an effect on the earnings distributed to shareholders.

As a result, stock prices collapse when inflation rises. However, the demand causes the prices of materials used in the production of finished products to increase significantly. Therefore, resulting in higher final goods prices.

However, investors turn to commodity futures to shield their money from inflation and preserve its value.

Hedge against potentially dangerous geopolitical activities

Conflicts, protests, and wars interrupt the supply chain. However, it results in resource shortages as it becomes more difficult to purchase and move raw materials to the factories where they are processed.

As a result, raw material supply is harmed. And, it further leads to the demand-supply imbalance. Therefore, it causes commodity prices to increase exponentially.

Pessimism prevails in the market during these occurrences.Hence, it leads the stock prices to drop. Thus, investing in commodities will help a portfolio avoid losses.

The facility has a high leverage

Futures and options are examples of commodity derivatives that provide a lot of leverage.

So, by paying just 5% to 10% of its contract value as upfront margin, one can leverage a large role.

Any small change in the price of a commodity will lead to exponential gains. Thus, when you use leverage in commodity trading, you open up the prospect of huge profits.

The minimal margin for commodity futures varies, but it is so much smaller than that of the minimum margin for stocks. For wheat futures, for example, you just need to put down 23 percent of the total trade value as initial margin.

Diversification

Commodities and stocks have a negative or lower correlation. Hence, they are typically raw materials used in the production of finished products.

Increasing commodity prices raises the cost of production. However, it decreases profits and leaves less for shareholders. Therefore, it leads to lowering earnings per share.

As a result, the stock prices would eventually fall.

Inflation reduces the current value of potential cash flows charged by stocks. However, the future cash will also be able to purchase less products and services than it can now. Thus, it will lead decrease in value, stock prices fall.

commodity

Transparency

Commodity trades are all now performed on an electronic trading network. Also, These networks are open to all market participants.

The electronic trading system aids in fair market discovery by allowing for large-scale participation. However, it will not need any buyer and seller interference. Its price is determined by supply and demand. It eliminates the possibility of price manipulation.

When the seller and buyer offer the same price and quantity, this is known as price discovery. But, the buyer and seller stay confidential during the transaction. Thus, they allow a straightforward market discovery with no room for manipulation.

Trading Agro Commodities:

Since 2002, new commodity trading has been permitted in India. However, Buying and selling futures contracts can be done on either of the six agro – based commodity exchanges. Moreover, it allows you to trade in the agricultural commodity market. Also, two of the six commodity exchanges which enable commodity trading on its platforms are dedicated to agro-based commodities. National Commodity & Derivatives Exchange Limited and  the National Multi-Commodity Exchange are the two exchanges in question. Prior to 2017, trading in agricultural commodities was difficult. However, The Securities and Exchange Board of India has  authorised commodity trading from daily Demat accounts later that year.

You can study a product and speculate on its price if you’d like to invest in the agro – based commodities market. Also, one must pay the margin sum to your broker and purchase a futures contract if you really are confident in your forecast of future prices. The sale will take place at the specified future date throughout the contract. Thus, whenever it comes to commodity trading, brokers offer a lot of leverage. However, you should be mindful of the risks. Certainly, a couple of bad bets will easily deplete your hard earned cash.

Top agricultural commodities traded in the world are:

  • Coffee
  • Cocoa
  • Sugar
  • Corn
  • Wheat
  • Cotton
  • Soybean oil
  • Rice

Factors influencing Agro-based commodities are:

  • Abnormal climate changes, such as drought, a long rainy season, early or late frosts affect commodities. Also many other factors can wreak havoc on crops. Therefore, it reduces productivity.
  • The Capacity of a Farm – soil cannot be pressured to grow beyond its capacity, but, there are ways to increase production capacity, such as fertilising the soil to add nutrients. However, it allow it to grow more crops.
  • Pests are caused by certain weather conditions. However, in relation to spoiling crops, they can greatly increase crop production costs. Trying to control them can require a fencing, chemical or biological therapies, companion planting, or crop rotation. Thus, it together alters the input-output ratio.
  • Obtainable agriculture productivity can be poor in areas where access to mechanised farm machinery is restricted. This is because people tend to manage their crops by hand. However, this requires a significant expenditure of time, resources, and capital, Also, it limits the land’s total potential.
  • Market Supply and Demand – Farmers will adapt their practises to satisfy customer needs, which could have an effect on agricultural production. Governments have also paid farmers subsidies to reimburse them for not growing crops, skewing productivity initiatives.

Conclusion

Commodities aid in the development of a very well-balanced portfolio. As a result, commodities are becoming a popular investment choice for investors.

Moreover, there are various ways to invest in commodities, based on the traders. The commodity futures contracts are the most common among them.

PL Global Pvt Ltd is a reliable Ago-based commodity trading company. It is helping its clients to trade commodities easily.

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