While traditional investment avenues have mainly been stocks, bonds and mutual funds in the investment marketplace, the growth of India’s economy has spurred investors to search for other attractive options. Commodity derivatives has now emerged as an attractive investment gateway for portfolio diversification, as well as investing directly in companies, and thus directly contributing to the growth of the country’s economy.
Furthermore, in early 2019, the Securities and Exchange Board of India (SEBI), in an effort to raise funds from the primary market cleared way for mutual fund investments, which is expected to further deepen the commodity market, whose average daily turnover of futures trading in 2018-2019 was Rs. 25,648 crores, a 21 percent increase from Rs. 21,193 crores in 2017-2018.
Commodities also play a crucial role in nurturing trade relationships between countries, connecting countries through trade and commerce. While commodity trading isn’t as popular in our country as traditional equity trading, it provides an avenue to the investors to generate short-term gains, and long-term wealth accumulation.
What is commodity trading
Commodities play an important role in everyday life, whether they are related to energy, metals or food, and offer little to no differentiation with respect to the source. Commodities are also interchangeable with other goods of the same type. Furthermore, commodities are commonly divided into soft commodities and hard commodities. While commodity trading as an investment instrument is a relatively new concept in the country, dealing commodities is an old concept, tracing their origins to the beginning of human civilization.
Furthermore, commodity trading in essence is exchanging commodities in the marketplace. This type of trading focuses on buying and trading commodities such as silver and oil. Similar to stocks, commodities are traded on exchanges, where investors buy or trade goods to make profits from fluctuating market prices of the products.
Commodities, much like stocks trade as investment instruments in the commodities markets. Similar to any other market, the commodities market is either a physical or a virtual space, where interested parties can either buy, trade or sell commodities (raw or primary products) at present or future date. These commodities are included in national and international marketplaces, and their price is dictated by the economic principles of supply and demand.
Types of commodities
Commodities today are mainly grouped into four major sectors. Understanding the types of commodities available, and gaining knowledge of the market enables investors to make smart investment decisions.
Agriculture: Spices, grain, pulses, oil and oilseeds
Metals: Silver, platinum and gold
Energy: Natural gas, Brent crude, crude oil, thermal coal
Livestock and meat: Eggs, pork, feeder cattle
The legal entity that decides, regulates and enforces the rules and procedures for trading commodities, such as the standardized commodity contracts, and other related investment products is the commodities exchange. It is an organized market where various commodities and derivatives are traded.
Investing in commodities
Depending on the type of commodity, traders can find different ways to invest in commodities. Considering the fact that commodities are physical goods, there are four major ways for investing in commodities.
- Direct investment: Investing directly in the commodity
- Futures contracts: Using commodityfutures contracts to invest in the commodity
- CommodityETFs: Buying shares of ETFs (Exchange-Traded Funds)
- Commodityshares: Buying shares of stock in companies or organizations that produce commodities
The more popular method to invest in commodities is through futures contract, which is a contract between two parties to buy or sell a specific amount (quantity) of the commodity for a predetermined price, at a predetermined date and time in the future.
Commodities have become an attractive investment alternative for investors, as it helps in building a well-balanced investment portfolio. While commodity trading is a relatively new concept in the country, it provides investors with an alternative avenue to generate short-term gains. Furthermore, depending on the experience of traders, there are different ways to invest in commodities, with commodity futures contracts being the most popular method.
Unlike stocks and bonds however, the knowledge and information needed to make knowledgeable investment decisions in commodity trading is scattered, and it takes a considerable amount of time to do proper research, and truly understand the trends and factors that influence the commodity markets. With adequate research and the right approach however, investing in commodities can prove to be a profitable addition to an investor’s portfolio.