Commodity Trading Is Gaining Steam: 5 Reasons Why?

By Angel Broking | Published on 22nd October 2020 | 64

Commodity Trading Is Gaining Steam: 5 Reasons Why?

In India, investor’s perception regarding investment has undergone a sea change over the past few years. A decade back, you could see only a few players participating in the stock exchange, while ordinary Indians preferred to stay away from it. Most of them viewed stock trading similar to gambling, considered it a trap to lose money.  However, in the past few years, the number of investors in the exchanges rose significantly, and many of them are young millennials. 

So, what caused the change? 

Over the last few years, interest in investing in different asset classes, with an inclination towards commodity investment,  have grown significantly, and the following reasons are responsible for it. 

Simplified trading: It’s one of the primary reasons why commodity trading is on the rise. Over the past few years, several technological innovations happened in the domain of trading. Broking houses made a significant investment in upgrading their trading platforms to make it speedy, simple, and synchronised. Nowadays, you can trade easily from a laptop or smartphone without feeling the need to step out of the home. 

We also have seen the advent of rule-based investment engines, powered by data analytics and AI that empowered investors with low entry barriers and investment suggestions to make informed decisions. 

 Hedging Against Inflation: Historical data shows that when inflation is rising in the economy equities and stocks often underperform. But, commodity, as an asset class have faired better. Analysts have established a negative correlation between equities and commodities, which shows when equities are underperforming, investors use commodity as a hedge against inflation.   

Increasing Banking Option: Nowadays, banks are offering broad exposure to the commodity segment. Several activities have been undertaken by the institutions to safeguard the interest of the stakeholders and modernise the trading platform to match with the international level.

It prompted banks to expand their coverage and in turn, encouraged more retail investors to participate in the commodity segment. 

Rise of rule-based investment:  Commodity investment depends on various factors, including internal and external economic factors. Earlier, year-round fair price discovery was not possible but, nowadays, broking houses offer cutting-edge rule-based investment engine to help traders find the best options in the market. These engines shift through billions of data points to make the best investment recommendations to investors. Equipped with it, retail investors now can confidently participate in commodity trading as well. 

Increasing number of millennial investors: India has the largest pool of young population in the age group of 20-40. This section is educated, tech-nous, and well versed on different financial concepts, and they’re not afraid to explore various investment opportunities. 

Advantages Of Investing In Commodity 

Investing in commodities has several advantages – a primary reason to draw so much attention.

Diversification: In the long-run returns from commodity tend to diverge from stocks and bonds, and hence, it helps in portfolio diversification. Portfolio with assets that don’t move in lockstep lets you manage market volatility better.

Easier to understand: Commodity market is easier to understand, driven mainly by market supply and demand. As global factors influence sway market demand, traders take a position in the market using derivatives.

Potential Return: Commodity market is highly leveraged, meaning you can multiply your profit potential using margin. Use of margin makes commodity an attractive asset class.  

The Bottomline 

Interest towards commodity investment is growing, and these are some of the main reasons. Commodity, as an asset-class, offers vast investment choices in derivatives. In recent years, investor participation in the commodity segment has experienced a steep rise in tier-II and tier-III cities.