Table of Content
How do you invest in commodities? Can you invest in commodities in commodities in the first place? That is a question we will explore here while also looking at how to start trading commodities. The process of how to start commodity trading is not too tough since it is almost like equity trading and even the screens are almost like that. The only thing you need to know about how to invest in commodities is whether you want to speculate on the price movement or hedge using an underlying position. We will also look in detail at how to start trading commodities in India.
What are how you can invest in commodities? Frankly, there are many ways. You can invest in commodities by taking a speculative position in commodity futures. You can invest in commodities by taking a speculative position in commodity options. You can also invest in commodities using hedging by taking delivery of the underlying commodity. You can invest in commodities across the spectrum and these include precious metals, oil & natural gas, industrial metals, and agricultural commodities.
That is where your commodity trading service offered by brokers comes in handy. Today, most brokers offer commodity trading and it is possible to trade and also invest in commodities online using the internet interface. Commodity trading also provides diversification from your core exposure to equities and bonds, since they normally tend to be negatively correlated.
Commodity trading, in terms of popularity, is yet to become as big as equity or F&O trading. In a way, the commodity transaction tax or CTT has been a dampener on volumes. However, traders are increasingly becoming aware of the advantages of commodity trading and are also willing to try out this new product for play speculation and also for hedging risk.
The first step to start trading commodities, like in equity trading is to do the basic KYC and open your commodity trading account. As of now, the commodity trading account still has to be distinct from your equity trading account. Just as you need a demat account for equity trading, you also need a demat account for trading in commodities. Demat account functions like a bank account except that in this case, your holdings are the commodity futures or options position in the market. The demat account stores the information of your trades as well as the actual holdings of the instruments that you have invested in.
Currently, traders in commodities are permitted to open a demat account with NSDL. Broadly, there are 4 types of commodity contract commodities that are traded on the two major commodity exchanges viz. MCX and NCDEX.
Just as you have strategies in trading equities or futures and options on equities and indices, you also have strategies in commodities. Here are some of the popular strategies although the spread is not as wide as equity F&O due to the limited volumes.
Using moving averages and breakouts to do technical trading in commodities is one of the most popular strategies. When it comes to commodities, they normally go through a long supercycle. Within these cycles, the commodity prices tend to follow certain underlying trends that can be tracked with moving averages and by the price line cutting or below the moving average line. One more way to use the technical charts is by identifying breakouts. These breakouts are direction changes that are confirmed by the volume support and can be a useful guide to big returns.
Does commodity trading offer any unique advantages? It offers several advantages. Here is a quick summation. Let us look at four such advantages that trading in commodities offers you.
There is no cost to commodity trading. Of course, you need to have a demat account and you need to bear the costs in terms of annual maintenance and other charges. Similarly, the commodity trading account must have margins placed in advance before trading. Other than these basic items, there is no additional cost to commodity trading. Of course, there are brokerage and statutory charges payable when you execute trades in the commodity futures market.
It would be naïve to believe that it is simple to trade commodities. Normally, commodity trading around the world is specialized in nature with large institutions and corporates involved as key parties. There are lot of complexities like macro factors, cost of carry and demand supply factors that you need to track. More than being hard or easy, commodity trading calls for traders to be swift and extremely knowledgeable.
Commodity trading does entail risk for a number of reasons. Firstly, commodity prices can be extremely volatile. Most remember the time when crude oil went into negative in April 2020. Then there is the global factors like global supply, locust attacks on crops, central bank buying of gold etc which can impact commodity prices and are outside your control. Apart from the risk of price volatility, there is also the risk that you are taking leveraged positions in commodities via futures or options.
Invest wise with Expert advice
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
IIFL Securities Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.