Commodity trading is where various commodities and their derivatives products are bought and sold. A commodity is any raw material or primary agricultural product that can be bought or sold, whether wheat, gold, or crude oil, among many others. When you engage in commodity trading, such commodities can diversify your asset portfolio.
Commodity trading is the practice of buying, selling, and trading in commodities futures investing contracts whose values are dependent upon the performance of the underlying commodities. A futures contract is an agreement between buyers and sellers for a defined quantity of any commodity at a fixed price for the future. A commodity exchange helps investors for trading in the commodity market.
Before you start trading in a commodity, you must know about the different commodities available for trading or investing in the commodity exchange. There are four categories for commodities: Agriculture, Metals, Energy, and Livestock & Meat.
Advantage/Benefits
- Diversification – Commodity returns have a low correlation to returns from other assets. As an individual asset class, commodities can be considered to diversify your investment portfolio.
- Inflation safeguard – Commodities are considered a good hedge against inflation as their prices tend to rise during periods of high inflation. This helps maintain the purchasing power parity.
- Hedge against event risk – Supply disruptions during a natural disaster, an economic crisis, or war could push up the prices of commodities. However, the trading of commodities could help you guard against loss by leveraging strategically on price swings. For instance, to lock in the input price of a raw material, a consumer could take a long hedge by buying a Futures contract based on the commodities price today. Meanwhile, a producer that is aiming for a high sale price could choose a short hedge by selling a Futures contract.
- Internationally standardised prices
- Diversified Portfolio
- Quality Assurance
- Price Transparency
Who should invest in Commodity Market?
Anyone who wants to look beyond traditional investment products
Best suited for business traders and investors to hedge or invest in commodities Investors looking to diversify their portfolio beyond shares, bonds and real estate Commodities provide excellent opportunities to arbitrageur to profit from price inefficiency in the market