What are commodities and how do you trade them? (2024)

FAQs

What are commodities and how do you trade them? ›

Commodities trading involves buying and selling raw materials such as metals, energy, and agricultural products. Prices are influenced by supply and demand, geopolitical events, and global economic factors. Investors can use futures contracts and options to speculate on price movements or hedge against market risks.

Commodities are either for immediate delivery in spot trading or for conveyance later when traded as futures. Commodity markets deal in metals (aluminum, copper, gold, lead, nickel, silver, zinc, etc.) and “soft” items (cocoa, coffee, sugar, oil, etc.).

The account may be opened online or offline. Basic documentation such as an application form, KYC documents, bank details, and income proof are required. A member-client agreement is to be executed with the broker. Lastly, the commodities trading account needs to be linked with a demat account.

Generally speaking, commodities trade either in spot markets or financial commodity or derivatives markets. Spot markets can be physical or “cash markets” where people and companies buy and sell physical commodities for immediate delivery.

Advantages of Commodity Trading

Unlike stock trading or investing in mutual funds or ETFs, commodity trading offers tremendous leverage. In trading commodity futures, you typically only have to put up about 10% of the total contract value. This enables you to make much higher percentage gains with your trading capital.

You can trade commodity derivatives, such as futures contracts, as long as you have a brokerage account that allows for it. But futures contracts are largely designed for major companies involved in commodities rather than for individuals.

Because the supply and demand characteristics change frequently, volatility in commodities tends to be higher than for stocks, bonds, and other types of assets. Some commodities show more stability than others, such as gold, which also serves as a reserve asset for central banks to buffer against volatility.

Investing in commodities can provide investors with diversification, a hedge against inflation, and excess positive returns. Investors may experience volatility when their investments track a single commodity or one sector of the economy. Supply, demand, and geopolitics all affect commodity prices.

Brent Crude Oil

Accordingly, Brent Crude is considered the most used benchmark worldwide.

You can invest in commodities in a range of ways. Today, the top three in the list of commodities are crude oil, gold and base metals. It is worth taking a look at all three and finding out how to invest.

How much money is needed for commodity trading? ›

Try depositing about 10% of the contract value of the commodity you wish to trade, along with a maintenance margin. For example, if the margin money for trading a commodity is INR 40,000, you need to make a deposit of INR 4,000 plus the maintenance margin.

Uncontrollable factors such as inflation, weather, political unrest, foreign events, new technologies and even rumors can have devastating consequences to the price of a commodity. Investors investing in commodities must be able to bear a total loss of their investment.

Estimating the Role of Seven Commodities in Agriculture-Linked Deforestation: Oil Palm, Soy, Cattle, Wood Fiber, Cocoa, Coffee, and Rubber.

Commodities are traded on exchanges through futures contracts, stocks, and ETFs, and can also be bought and sold in their physical states. Products are sold on the market for consumption by the average consumer and can also be found in investment portfolios.

Three of the most commonly traded commodities include oil, gold, and base metals.

Stock markets are primarily for investing in company shares, aiming for capital gains and dividends. Commodity markets, on the other hand, serve the primary purpose of trading physical resources like iron, wheat, gold, etc. Investors use commodities to hedge against price fluctuations and diversify their portfolios.