The commodity is a common term we hear in the share market. The question comes to our mind: what is this commodity ?? In this article, we will discuss what a commodity is, the types of commodity, the Advantages and disadvantages of a commodity, and how to trade in a commodity. Let’s dive right into it and learn about commodities and ways to earn from commodities:-
What is a commodity?
A commodity is a generally used good used for trade, and the trader can exchange it with other similar types of goods. Examples of commodities are gold, oil, gas, grain, etc.
For investors, You can diversify your portfolios by purchasing commodities and not stick to just traditional shares because the commodity prices move in opposite directions of stocks. In addition, during volatile market periods, investors depend on commodities.
Earlier, commodities trading needed a good amount of time, expertise, and money and was primarily limited to professional traders. Now, there are more options available to trade in commodities.
Types of commodities?
Commodities traded are divided into four major categories:-Metal, Energy, Livestock And Meat and Agriculture:-
Metal:- Gold, Silver, Bronze and Platinum are part of metals. Traders buy metal commodities when the market is bearish. Especially buy gold as it is a reliable metal with good value, and investors also buy precious metals like gold to hedge against currency devaluation or high inflation.
Energy:- commodities like crude oil, natural gas, heating oil, and gasoline are part of energy commodities. The output of oil reduced globally, which led to an increase in the price of oil. This decline came from famous oil wells. Demand for products related to energy increased while there was a decline in oil supply. Those interested in energy-related products should be aware of the Organization of the Petroleum Exporting Countries(OPEC) that wishes to replace crude oil as a primary energy source. They execute an economic downfall and shift in production which has a huge impact on the energy sector.
Livestock And Meat:- Pork bellies, live cattle, feeder cattle are part of livestock and meat products. The sector was popular until 2020, but there was a downfall because of the global pandemic, but the situation improved.
Agriculture:- Corn, cocoa, wheat, rice, sugar are part of agriculture commodities. This sector is volatile during summer or when the weather changes. Traders interested in the agriculture sector, limited agriculture conjoin with population growth will provide the opportunity to gain a lot from this sector.
Advantages and disadvantages of commodities?
Everything has an advantage and a disadvantage. Let’s discuss the advantages and disadvantages of commodities and try to find out that is it beneficial to invest in commodities or not:-
Protecting against inflation
While there was an increase in demand for goods and services, There was an increase in the price of products and commodities that make raw materials. Due to this, the interest rate increased, and there was a rise in the cost of the loan and a significant fall in the company’s net income, and the profit shared to shareholders had a massive effect due to this spike. So the prices of stocks drop during inflation, but it is the opposite for commodities as prices for manufacturing rise majorly as the demand grows. The increase in the price of final goods during inflation relates to commodities that made these products. Investors shift to commodities futures so that they can protect their money from inflation while maintaining value.
Leverage is a great thing, but it is also a bad one because, in the short term, it can help you to maintain those large positions, but your initial margin requirement will be 5%. You have opportunities to buy commodity futures that value 1,00,000 rupees by paying only 5000 rupees. There will be a massive impact on losses and gains even if a minute change in your contract price. You can instantly lose 10000 rupees with a slight shift in 10 rupees. The lot size of the contract purchased can range from 100 to 1000 contracts. There is a high amount of risk with low margin requirements, which can wipe out all your investments.
How to trade in commodity future
The process to trade in commodity futures is simple. Let’s go through some steps and learn about how to trade in future:-
- You need to research, look at the commodity you want to deal in and then deposit the margin amount to the broker.
2.) After you deposit money and talk to your broker about what you want to do with the money, the broker will place an order for you.
3.) The buyers and sellers meet online on the exchange platform.
4.) The settlement price is determined during the exchange for every commodity when the market is closing. After reading the movement of the price of commodities, the difference of exchange is debited or credited from the trader’s account.
5) Trader will get if the margin surpasses, but the trader has to pay the difference if the margin falls short.
6) Traders close the position before the expiration of the contract. He can also opt for a delivery option, and that option requires a separate document and process
Commodities are a good option, but there is a high risk with high profit and high leverage. Commodity futures are a good option that will help you save from the inflation in prices. However, the benefits come with disadvantages. It is beneficial to read about it before investing money in it. The market is volatile as prices of essential commodities change regularly as the demand and supply of essential commodities change regularly. There are a lot of buyers and sellers in the market, which will eventually result, the market will be volatile. Investing in commodities will make your portfolio diverse, but you need to have a lot of time, money and effort to invest in the commodity market. There are reliable metals, the energy that has a lot of demand, agriculture commodities with great potential, and livestock and meat rising quickly. Overall, commodities are a great option to invest in, but it’s tough for investors to put money in with high prices as they have low capital. But brokers like Brokereo and T1 Markets are some great brokers that will help you invest in the commodity at a low price and less risk.