Commodity investing is the type of investment in which the investor invests his money in one or more commodities on the market in order to achieve profit and good returns. Let's understand commodity investing in detail and the types of diversified investing options that an investor can invest their money in.
What is Commodity
A commodity, as mentioned above, is any commodity that is exchanged for other commodities of the same kind. Commodity trading has existed since the earliest years of human life, long before the advent of stock trading. Commodities are basically raw materials that are used as building blocks in the production of various goods and services, which are then sold in the market. Buying commodities helps diversify an investor's portfolio as it is the exact opposite of buying stocks in the market.
What is the commodity market?
A commodity market is a market that facilitates the exchange of goods for immediate delivery between residents of the country. The main advantages of investing in raw materials on the market are:
- Investments can be made in short and long-term products.
- Help with portfolio diversification
- Provides an advantage in fighting inflation rates in the economy
- Reduction of the risk taken
Types of commodity investing
Investing in commodities can be roughly divided into 2 parts, namely hard commodities and soft commodities. The following products fall into these categories of commodity investing types:
- Hard raw materials
- Natural gas, crude oil, gasoline, etc.
- Precious metals
- Gold, silver, platinum, copper, etc.
- Soft raw materials
- Cattle and Meat
- Poultry, livestock, beef cattle, pigs, etc.
- Wheat, rice, corn, salt, sugar, soy, etc.
How to invest in the commodity market?
All commodity market transactions in India are governed by the Commodity Derivatives Market Regulations (CDMR) regulated by the Securities Exchange Board (SEBI) of India which merged with the Market Commission by 2015.
All commodities in India are traded by the following 4 commodity exchanges:
- (NCDEX) National Commodities and Futures Exchange
- (MCX) Exchange of multiple products
- (NMCE) National Multiple Commodity Exchange
- (ICEX) Indian Commodities Exchange
Types of Commodity Exchanges
The exchange of Commodity can be done in two general ways:
- Physical Goods
Physical goods are traded by commodity brokers and institutional investors. Your goal is to resell the products at retail.
- Derivative Contracts
A derivative is the opposite of physical and all transactions are conducted online using digitized contracts. It's the new way to make simple, hassle-free transactions without physical stores.
Type of commodity investing traders
Depending on the exchange, there are two types of traders in the commodity market:
Hedgers enter into futures contracts rather than getting involved with traders in current markets. Because of futures trading, current market rates do not affect hedgers or the rate at which they deal with investors.
Speculators are investors who aim to make profits in the current commodity market. Investors predict future contracts based on various factors related to the commodity market and make investments accordingly.
Commodity Exchange Prices
Several factors help determine the price of investment in raw materials in an economy. Here are some of the most important factors that help determine the market price of raw materials:
- Market supply and demand
Increased demand means an increase in the price of a product due to increased demand and decreased supply. The constant battle of supply and demand is very daunting and retail investors are generally looking for safer investment options rather than regularly checking the commodity market.
- The world stage
Any activity that takes place anywhere in the world directly affects the sale of goods. For example, the United States is the world's largest supplier of gasoline. If there are major riots in the United States, it will have a direct impact on the price of gasoline, globally and nationally.
- Market prospects
The probability of major changes in the prices of certain commodities, such as precious metals, is low, so drastic changes in the stock market cause investors to turn to commodity investings. Therefore, commodity investings are considered a safer investment option compared to the stock market.
- External factors
The production of the commodity influences the variation in the price of the commodity in the market. For example, an increase in the cost of production affects the selling price of the commodity and ultimately affects the equxilibrium.
Why invest in the commodity market?
These are the reasons why an investor should invest in the commodity market instead of in other investment markets:
Also Read: LIC's market capitalization drops to seventh place, behind ICICI Bank
- Portfolio diversification
- Hedging against inflation
- Significant returns
- Lower trading margin than stocks and bonds