Commodities Trading has emerged as a growing investment option in India in recent years. Other than stocks trading and investments, new and experienced investors are diversifying into commodities as an alternative investment tool.
The common myth about commodities trading is that it is highly risky, complicated and difficult to understand. The fact is that Commodities is an asset class that can help any investor diversify his portfolio other than shares and traditional investments like FDs, PPF and Real Estate.
Commodity Trading has been in existence from historical times when goods were traded in exchange for other goods in barter system. Today there are commodity exchanges all over the world that manage exchange of commodities just like stock exchanges. They are governed by regulatory bodies and under well-defined legal frameworks.
Commodity Markets work on Demand Supply equation prevailing in the market. When the demand for a particular commodity is high, it’s price goes up and vice versa.
Let us understand the benefits of commodity trading, free commodity tips, and why it deserves an allocation in any portfolio.
Hedge Against Inflation:
Commodities serve as perfect hedge against inflation in the economy. When inflation goes up in the economy, it impacts the returns from other investments like stocks, mutual funds, fixed income and deposits. However, commodities are impacted positively by inflation.
In an inflationary economy, when prices of goods and raw materials rise, the price of commodities rise. Hence Commodities provide a perfect hedge and cushion against inflation which eats away the value of your money and investments.
Hedge against Uncertain Situations:
There are certain events that arise out of nowhere and impact the economy and markets. War, natural disasters, drought, pandemic etc. all these events can send the stock markets falling and impact returns from all asset classes negatively.
Commodities may get positively impacted by such events. Price crude oil, metal or agricultural goods may rise in such situations due to high demand or supply disruptions. Thus commodities cover the risk of uncertain situations and Black Swan events.
Hedge against fluctuations in Other Asset Classes:
Diversification and asset allocation forms the core of any portfolio. Commodities work as an excellent asset class to diversify the risk in stock market, debt and real estate. There is a low or negative correlation between stock market returns and commodities returns.
Commodities respond to economic and geopolitical factors differently from other asset classes. For example, when stock markets fall, prices of gold increase, as gold works as safe haven. Hence commodities Hence an allocation in commodities is preferred to mitigate risk by diversification.
Liquidity and Leverage:
Commodities are traded through exchanged and highly liquid. A trader or investor can liquidate his position any time and encash his investments any time unlike real estate.
The margin required for commodity trading is very low compared to other investments. You can take a significantly higher position by placing only 5-10% margin hence one can gain higher even with low margin.
High Growth Opportunity:
The demand supply equation works in favour of commodity investments. Increase in demand of a particular commodity sees a rise in price in a very short time. For example, a surge in economy leads to infrastructural investments and thus price of metals goes up rapidly leading to high gains in metal prices. The opportunity of a gain is high in commodities.
To trade in commodities, you need a separate commodity demat account from the National Securities Depository to trade just like in stocks. Commodities trades are executed on electronic trading platform accessible to all market participants.
The electronic trading platform helps in fair price determination due to large number of players participating in the exchange. The price is determined by supply and demand on the basis of the price and quantity quoted by the seller and buyer. The electronic exchange enables a transparent pricing without any manipulation. The commodities trade is fair, transparent and well regulated.
In a nutshell, commodities offer a great diversification for any portfolio to cover the risk in other investment classes. It is important for any investor to arm oneself with proper information and knowledge prior to investing in commodity trading. To know more about commodity trading and open an account, please contact Enrich Broking