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To Learn About Commodity Trading, We Must First Know What Commodity is in the Share Market.
Commodities are undifferentiated raw products like wheat, crude oil, gold, copper, silver, etc. They are bought and sold in physical form as a product. In the commodity share market, the future price of a commodity is used to create futures contracts to buy or sell some ‘x’ quantity of a commodity at an agreed-upon price sometime in the future.
So, What is a Commodity in the Share Market?
The underlying product usually comes from nature, and commodity trading is selling future contracts made in exchanges that handle commodities trading. Commodity futures trading began in the 1840s in the USA for Wheat and in 1875 in India for Cotton. Now, it is one of the most talked about futures trading types, where speculators take advantage of price movements of commodities. The most popular commodities traded presently are,
Gold
Crude Oil
Silver
Copper
Natural Gas
Commodity Options are options (Call options and Put options) on a commodity futures contract. It is a right but not an obligation to buy or sell the commodity futures contract. The Commodity Futures and Options together from what is commonly called Commodity derivatives trading, wherein you do not own the commodity as such but profit from its price fluctuations.
How can you trade in commodities?
Open an Account:
First of all, open a commodity trading account with a well-established broker. You must first check their website and trading app if Commodities trading is included. Also check if they have a separate section for Commodity tips today. It is very important to get timely tips in commodities trading.
Choose the commodity market:
Next, choose which commodity you want to trade in. Here you must consider the various choices and your risk appetite. Commodities trading is slightly riskier than share trading usually. But even within Commodity trading, you should be clear about which particular commodity you are willing to invest in. For e.g., Crude Oil is widely popular but the risk involved is also high. Every commodity differs in risks involved, trends and investment involved.
Understand the current trend:
Study the current trend for the commodity of your interest. Never make a random guess and unnecessarily risk your money. If you do not have the time to do it yourself or are new to commodities trading and do not have the experience, do take the advice from an experienced broker. Once you understand the current trend, you can decide what to do next.
Decide when to buy and when to sell:
Based on the trend analysis, if you feel the price will rise in future, then you can go ahead and buy now. This step is called “go long”. If you feel the price will go down sometime soon for a futures contract, then you can decide to sell. This step is called “go short”.
Decide the volume of trade:
After deciding to buy or sell, you must then carefully analyse and come up with the volume of trade you want to buy or sell.
Take Risk Management measures:
Monitor your commodity price chart closely, and ensure you are covered with a “Stop Loss order” where you decide to cut your losses or cap your profit. This is a very important step since prices may suddenly rise or drop based on world events or natural calamities over which we have no control. Overall, trading in commodities is more volatile compared to share markets. Always, learn about commodities trading first and then invest.
Frequently Asked Questions:
Commodities are undifferentiated raw products like wheat, sugar, crude oil. They are physically bought and sold in the real world. In the commodity share market, the future price of a commodity is used to create futures contracts to buy or sell set quantity of a commodity at an agreed upon price, within an agreed upon time in future.
These contracts are made in exchanges that can handle commodities trading.
The differences between Equity and Commodity are as follows:
| Equity | Commodity |
|---|---|
| There is no physical underlying product. It is only on paper – a said number of shares of a company. | There is an actual physical product based on which the futures trading is done. For e.g., Wheat, Crude Oil, Cotton, Gold etc. |
| Investors purchase the actual shares. | Investors try to make profit from price fluctuations based on futures trading, and do not purchase the actual commodity. |
| It is for long term, where the investors purchase shares of a company and hope to grow their money invested over years as the company grows and makes more profit. | It is for short term, within days or months where the price of the commodity to be bought or sold is agreed upon, and profit scalped by the investors based on increase or decrease in price of underlying commodity. |
This depends on what your investment goals are, how much risk you are willing to take, and the time you have at hand to invest. Because, Equity trading and Commodity trading are very different in timeframe and price fluctuation factors. In Equity Vs Commodity, as an investor, if you are looking to park your money in an entity and hope to grow your money over years, then Equity Trading will be more suitable for your goals and risk appetite.
Whereas, Commodity Trading is more profitable for investors who have experience and knowledge about the underlying commodity and factors affecting its price, especially those who are adept at price trend analysis and can easily make a profit based on daily or weekly price fluctuations. You need to spend more time on a daily basis to make a profit in this case.
Commodity Trading may not be good for beginners since the price fluctuations of underlying commodity cannot be predicted that easily. This is because unexpected Environmental Upheavals like heavy rains, earthquakes etc., World Politics, Wars, Government Policy changes, can all have a sudden impact on commodity prices. We need to have basic knowledge in Trend Analysis and Latest News on varied current affairs related to the commodity if we can intelligently buy or sell futures in commodity trading.
So, if you are a beginner, it is advisable to have a knowledgeable broker who can help you with investing in commodity trading.
The term Equity in share market implies the shares one buys of a listed company in the exchange. The more the number of shares you buy of a company, the more money you have invested in the particular company. As your percentage of shares increases, you get more rights on the ownership and share in profits of the company.
You can only buy shares of a listed entity in the stock exchange or share market.
