A commodity is a physical good whose quality remains unchanged regardless of where you buy it. You can also interchange it with other goods of the same kind. Common examples include oil, natural gas, gold, grains, pulses, etc. Commodity Trading was complex and limited only to professional traders earlier. They were considered risky in the most basic sense because their market depends too much on unpredictable patterns like the weather and epidemics.
However, Commodity Investment and Trading have slowly gathered steam in Indian markets, including among retail investors. Here, we explore why one should trade and invest in Commodities.
The reasons to consider the Commodities Market are:
- Hedge against inflation: One primary reason to invest in Commodities is that they are a hedge against inflation. If the demand for a product rise, its price rises, and so does the price of the raw material used to produce them. Commodity prices rise even when inflation increases, thus offering protection that many assets cannot.
- Higher returns: Another reason is that Commodities provide returns that stocks and bonds cannot over time. Rising demand due to globalisation and global infrastructure projects have greatly influenced commodity prices. This demand is expected to increase only in the next couple of years.
- Diversification: It also diversifies your portfolio and lets you manage volatility easily. A diversified portfolio also enables you to manage the unsystematic risk related to specific factors you cannot control.
- Leverage: Commodity Market Trading in derivate markets offer more leverage to investors, allowing them to take both sells and buy positions. Investors must pay a margin of as little as 10% of the total contract value to gain leverage on a commodity of greater value.
- Liquidity: Commodity Trading is usually done in Futures, and Futures Marketis more liquid than Spot Markets. Besides, most investors in such markets are often hedgers and arbitrageurs looking to make a quick profit.
However, Commodity Market is too much risky to dive in headlong. You should consider risks such as broad market exposure, high volatility, and principal risks, among others. You often bet on emerging markets fraught with wars and economic stability with Commodities. There are also chances that such factors affect the commodities so much that you lose your principal amount.
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