In today’s time, people hear a lot about investment options like stock market, mutual funds and cryptocurrency, but very few people know that commodity trading is one of the most hot topic and a very huge and profitable investment segment. If you want to know what is commodity trading, how it is done, what are its benefits and risks, then this article is for you.
In this article, we will give every necessary information in very simple language so that even a common man can understand it easily.
1. What does commodity trading mean?
“Commodity” means things that we use in everyday life like- gold, silver, wheat, rice, oil, cotton, sugar, and more. When you buy or sell these things at prices that will rise or fall in the future, it is called commodity trading.
Example: Lets with the current or latest price or value of Indian gold today is ₹ 1,000 per 10 grams. If you think that its price will increase after 1 month, then you make a deal right now. If the price really increases, then you will make a profit.
2. How many types of commodities are there?
Commodities are mainly of two types:
1. Hard Commodities: These hard commodities are the assets, which are extracted from the ground or which are minerals:
- Gold
- Silver
- Copper
- Crude Oil
- Natural Gas
2. Soft Commodities: These are the things that are obtained from agriculture or animal husbandry:
- Wheat
- Rice
- Cotton
- Soyabean
- Coffee
- Sugar
3. How is commodity trading done?
To do commodity trading, you have to join a trading platform or brokerage firm. There are two major exchanges in India where commodity trading takes place:
- MCX – Multi Commodity Exchange (mainly for metals and energy commodities)
- NCDEX – National Commodity and Derivatives Exchange
You can do commodity trading by opening an account on these platforms.
Step by step method:
- Open a trading account in a good brokerage house.
- Submit KYC documents.
- Login from the platform or mobile app.
- Select the commodity in which you want to trade.
- Place a buy or sell order.
- Track profit or loss and close the trade on time.
4. How to make profit in commodity trading?
Commodity trading is completely based on price fluctuations. If you buy at the right time and then sell at the right time, you can make good profits.
- Example:
- You bought 1 kg of silver for ₹70,000.
- A week later its price became ₹75,000.
- You sold it.
- You made a profit of ₹5,000.
5. Can there be losses in commodity trading?
Yes, just like there is profit, there can be losses as well. If you trade without information, or the market goes in the wrong direction, then you may have to suffer losses. Example: You thought that the price of crude oil would rise, but due to some international event its price fell. You went into loss.
6. Benefits of commodity trading
- Diversification: If you have invested only in the stock market, then investing in commodities reduces your risk.
- High liquidity: You can easily enter and exit in commodity trading.
- Opportunity for profit in a short time: Price movement is fast, which can give quick profit.
- Opportunity for hedging: People whose business is related to commodities trade to reduce risk.
7. Disadvantages of commodity trading
- There is a lot of volatility: Commodity prices can change suddenly.
- Margin system can be risky: You can make a big deal with less money but the loss can also be equally big.
- Correct information is necessary: If you do not do research, you may suffer a loss.
8. Can a common man do commodity trading?
- Of course he can. But before starting, a little basic knowledge is necessary. Like:
- Which commodity is traded more when?
- In which season, the price of which agricultural commodity increases or decreases?
- How do things like international news and crude oil affect it?
9. Who all are involved in commodity trading?
- Investors – With the aim of earning profit.
- Hedgers – To protect the risk of their business.
- Speculators – Those who trade on the estimation of price movement.
- Arbitragers – Arbitrage is when, Those people who bought from one market and sell in another market.
10. What is the difference between commodity trading and share trading?
- Point Share Trading Commodity Trading
- Trading Shares of commodity companies Metals, agricultural products, energy
- Exchange NSE, BSE MCX, NCDEX
- Time 9:15AM – 3:30PM Morning to Night
- Price movement Based on fundamentals Weather, demand-supply
11. What is important to know before starting commodity trading?
- Basic knowledge of futures and options
- Fundamental and technical analysis
- Money management skills
- Risk tolerance
- Reading and understanding daily news updates
12. Is commodity trading right for the long term?
If you want to make a long term investment, then it is better to buy physical commodities like gold and silver. But in trading futures and options usually short.
