Commodities are among the most exclusive investments available to amateur investors. Opportunities are famously hard to come by. Although there are methods to do it on a shoestring budget. Every tool that investors use to enter this exotic asset class will be in this definitive guide on how to invest in commodities.
Commodities, in basic terms, are agricultural goods or natural resources that we can purchase and sell on commodity exchanges. In terms of commodity trading, you can invest in or trade in a wide range of goods that are important to the global economy.
The goods available for trading on India’s commodity exchanges can be divided into four categories:
Crude oil and other fossil fuels are sources of energy.
Metals include gold, silver, copper, platinum, and other precious metals.
Rice, corn, wheat, beans, cotton, and other agricultural products
Pork, goats, chickens, and other livestock are examples of meat and livestock
There are exclusive exchanges for commodities, just as there are exclusive exchanges for equity markets, such as the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). In India, there are currently over 20 regional commodity exchanges. However, there are currently six nationalized commodity exchanges. They’re –
- Exchange of Several Commodities (MCX)
- The National Commodity and Derivatives Exchange is a stock exchange that trades commodities and derivatives (NCDEX)
- The National Multi-Commodity Exchange (NMCE) is a multi-commodity exchange (NMCE)
- Commodity Exchange of India (ICEX)
- ACE Derivatives Exchange (UCX) Universal Commodity Exchange (UCX) (ACE)
However, the bulk of commodity trading and investing takes place on the MCX and NCDEX exchanges. Almost all of the stockbrokers in India are therefore commodity traders with these two exchanges. As an outcome, after submitting the necessary paperwork, you will be willing to invest or trade in the commodity market via your trading account.
Investing in commodities
Once you allow the commodity tab in your trading account, you can begin investing or trading in the commodity market. You will need to request a few relevant documentation in addition to the ones you may have already provided when starting your Trading/Demat account.
Derivatives contracts let you trade or invest in the commodity market. If you’ve been trading stocks for a while, you’re probably familiar with derivatives. These are financial instruments whose value is derived from an underlying asset. Commodity futures and options contracts are two distinct ways to exchange commodities.
Commodities, such as gold, silver, and oil, may be used to diversify a stock or fund portfolio because their value increases when conventional asset prices decline. Exchange-Traded Commodities (ETCs) and purchasing shares of companies that mine or manufacture the commodity are also the two main ways to invest in commodities.
EFTs( Exchange Traded Commodities)
An exchange-traded fund (ETF) is a form of mutual fund that is traded on the stock exchange. You invest in the ETF by buying shares through a carefully selected stockbroker or a stocks and shares ISA.
An ETF would invest in commodities with the money raised from investors. Physical and synthetic investments are also available.
Commodity futures contracts bind buyers and sellers to purchase or sell the underlying stock at a set price on a set date, which is the contract’s expiration date. Commodity futures contracts end on various dates than commodity futures contracts, which end on the last Thursday of each month.
Gold futures, for example, are typically bi-monthly contracts that expire on the 5th day of the month you specify. Agricultural goods futures contracts, likewise, end on the last day of the expiry month.
You can trade in the commodity market by options in addition to futures. While futures contracts require buyers and sellers to trade their contract by the expiration date, options contracts allow them to use their right to buy or sell before the expiration date.
There are two types of options: Call (CE) and Put (PUT) (PE). CE options give you the right to purchase the underlying asset at the agreed price before the expiration date. PE options grant you the ability to sell the same. The “Strike Price” is the price at which the buying and selling take place.
Tips for investing in commodities
Global cues have an effect on commodity prices.
Global cues, unlike stock prices, which are influenced by company success and day-to-day activities, as well as Indian stock markets determine commodity prices. For example, if the weather in the United States is not conducive to cotton cultivation this year, cotton prices will rise, implying that global cotton production will fall.
Similarly, if oil reserves in the United States continue to rise, it indicates that supply exceeds demand. As a result, the price of crude oil on the commodity market could plummet. As a result, if you want to start investing in commodities, you’ll need to keep a record of global cues.
The Key to Effective Risk Management
Commodities of all kinds come with their own set of threats. As previously mentioned, the weather has a significant effect on cotton production. Similarly, as global stock prices fall sharply and people search for alternative investment options, a product like gold sees an increase in price.
As a result, before exchanging commodities, it is important to comprehend the various risks associated with each commodity. Some of the goods have a reputation for being extremely unpredictable.
Stop Loss should always be included.
Using a stop loss is one of the most powerful ways to limit your losses. As soon as you take a buy/sell place in any commodity, set a stop loss. Stop losses are used to set a cap on how much money you can lose. If you buy gold for Rs. 52,150, for example, you can set your stop loss at Rs. 52,000.
You want to have the price of gold increase beyond Rs. 52,150 as a buyer. However, if the price continues to fall, your place will be squared off until the price hits Rs. 52,000, minimising your losses.
The commodity market will reward you with large profits if you have sufficient expertise and experience. However, you should be ready to book losses if a specific investment or trade does not perform as anticipated.
PL Global Pte. Ltd. is a leading commodity trading company which deals in various different commodities. PL Global Pte ltd has made commodity trading very simple and easy.