What Is Commodity Trading in India: Basics and FAQs
This blog will answer the FAQs on commodity trading in India. Find out if commodity markets are better or worse than stock markets. Learn about the alternatives to commodity trading in India.
Commodity trading may be considered as the lesser-known cousin of stock trading. Instead of equity, it gives investors access to 100+ commodities like sugar, cotton, silver, etc.
In this blog, we will look at some of the most important questions surrounding commodity trading in India. Along the way, we will try to figure out how commodity trading compares to stock trading. You can consult a Cube Wealth Coach or download the Cube Wealth App.
Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth.
Where To Invest In Commodities?
Investors trade commodities like crude oil, natural gas, silver, cotton, etc. in the commodity
Commodity trading may be considered as the lesser-known cousin of stock trading. Instead of equity, it gives investors access to 100+ commodities like sugar, cotton, silver, etc.
In this blog, we will look at some of the most important questions surrounding commodity trading in India. Along the way, we will try to figure out how commodity trading compares to stock trading. You can consult a Cube Wealth Coach or download the Cube Wealth App.
Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth.
Where To Invest In Commodities?
Investors trade commodities like crude oil, natural gas, silver, cotton, etc. in the commodity market The commodity market can be a physical or virtual marketplace.
If it’s a physical marketplace, investors will usually own the commodity and trade it for cash or cash equivalent commodities. A virtual commodity market, however, generally includes commodity exchanges.
Most virtual commodity investors have no interest in physically owning the commodity. The main interest lies in profiting from the price differentials that may arise due to supply and demand or other factors.
Investors enter into futures contracts to trade commodities. A futures contract is a legal agreement between a buyer and a seller that carries a fixed price and a fixed date of sale/purchase of the commodity.
Futures contracts adhere to the Forward Contracts (Regulation) Act, 1952. But commodities aren’t the only assets that are traded using futures contracts.
What Are The Advantages And Disadvantages Of Commodity Futures?
Advantages Of Futures
Disadvantages Of Futures
Transparent pricing
Expiration date
High liquidity
Affected by natural disasters
Hedge against inflation
Prone to geopolitical risks
Commodity futures may be suitable for the short term and long term. However, it is prone to various risks that span from geopolitical threats to natural disasters.
Another way to invest in commodities includes Exchange Traded Funds (ETFs). ETFs are unique in that they combine the features of both mutual funds and stocks.
In general, ETFs are mutual funds that can be bought and sold like stocks. This naturally means that ETFs are listed on major exchanges. ETFs track the value of the underlying investment that may be:
Index
Commodity
Sector
In India, ETFs are allowed to invest in only 1 commodity, gold. However, there are 1000+ mutual fund schemes that you can invest in based on your risk profile and goals.
Goods like Oil, natural gas, gold, silver, cereals, etc.
Shares of Tesla, Google, Amazon, Facebook, etc.
Inflation
May fare better
May fare worse
Liquidity
Moderately high
High
Volatility
High
Moderately High
Available on Cube
No
Yes
Conclusion
Overall, commodity trading offers investors the chance to diversify by profiting from price movements of commodities like cereals, crude oil, pulses, cotton, silver, gold, etc.
However, commodity trading carries several unknowns while commodities themselves are affected by geopolitical, environmental, and supply & demand risks.
There are alternatives to commodities like US stocks and International mutual funds that offer geographical diversification and opportunity to leverage currency appreciation in several countries.
The Cube Wealth app helps you invest in the best US stocks for as little as $1 with advice from RIA, Rick Holbrook. Cube also gives you access to industry-leading advice from Wealth First, Cube’s mutual fund advisor.
Watch this video to learn more about US stock advice on Cube Wealth
FAQs
1. Who participates in commodity trading in India?
Ans. Commodity trading in India involves various participants, including farmers, producers, traders, speculators, and investors. It offers a platform for hedging against price fluctuations for producers and an investment opportunity for others.
2. How does commodity trading work in India?
Ans. Commodity trading works by buying or selling contracts for a specific quantity of a commodity at a predetermined price and future date. Participants can either trade in the physical market or engage in derivatives trading to speculate on price movements.
3. What are the key commodities traded in India?
Ans. Commodities traded in India encompass a wide range, including agricultural products (such as wheat, rice, and cotton), metals (like gold, silver, and copper), energy resources (crude oil and natural gas), and various other goods like spices and pulses.
4. Are there risks involved in commodity trading in India?
Ans. Yes, commodity trading carries risks such as price volatility, geopolitical factors, and market fluctuations. Participants need to be aware of these risks and consider risk management strategies.
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