Commodity Trading And Investing: An Alternative Investment For Volatile Equity Markets
In this blog we look at commodities as an alternative investment option to beat inflation and other market related risks. Find out how you can invest in tried and tested investment options with industry leading advice using Cube Wealth.
Diversification is important for an investor’s portfolio. To balance risks versus returns, some investors may turn to low-risk or high risk market related instruments. An alternative to investing high-risk or low-risk market related instruments is trading in the commodities market.
What Is Commodity Trading?
Commodity trading refers to the buying and selling of commodities such as:
Gold
Silver
Natural gas
Crude oil
Cereals
Spices
Cotton
It is widely accepted that commodities are inversely related to market fluctuations. The price of commodities may remain stable or bullish during economic or geo-political crises.
Holding commodities may help mitigate risk of inflation and market volatility. Therefore, they are considered valuable assets by a certain school of investors.
Buying and selling price of commodities is generally determined by a ‘futures contract’. A futures contract is an agreement between a buyer and a seller to trade a commodity for a predetermined price on a set date.
The Indian commodity market and commodity exchanges are regulated by the Forward Markets Commission (FMC). The futures contracts are gover
Diversification is important for an investor’s portfolio. To balance risks versus returns, some investors may turn to low-risk or high risk market related instruments. An alternative to investing high-risk or low-risk market related instruments is trading in the commodities market.
What Is Commodity Trading?
Commodity trading refers to the buying and selling of commodities such as:
Gold
Silver
Natural gas
Crude oil
Cereals
Spices
Cotton
It is widely accepted that commodities are inversely related to market fluctuations. The price of commodities may remain stable or bullish during economic or geo-political crises.
Holding commodities may help mitigate risk of inflation and market volatility. Therefore, they are considered valuable assets by a certain school of investors.
Buying and selling price of commodities is generally determined by a ‘futures contract’. A futures contract is an agreement between a buyer and a seller to trade a commodity for a predetermined price on a set date.
The Indian commodity market and commodity exchanges are regulated by the Forward Markets Commission (FMC). The futures contracts are governed by the Forward Contracts (Regulation) Act, 1952.
4 Reasons For Investing In Commodities
#1 Hedge Against Inflation
Most commodities are inversely related to a dip in the currency value. When the value of a currency goes down, investors may turn to investing in commodities, particularly gold.
This may cause the commodity prices to rise, further enhancing the value of the assets held. Hence, commodities act as an effective hedge against inflation.
#2 Hedge Against Stock Market Volatility
When stock markets are volatile, the value of financial assets like equities and mutual funds may experience depreciation. Commodities may help diversify the risk and balance the loss of income or gains on market-related assets.
However, there are more efficient non-market linked alternative investments like P2P lending and digital gold that you can invest in using Cube Wealth. Read more about P2P lending and digital gold here:
As an alternative to market-dependent assets, commodities are more liquid than assets like real estate. However, they have lower liquidity in comparison to other financial assets like stocks and bonds.
Commodities are known to be extremely volatile in nature. When the securities market is experiencing turbulence, commodity prices tend to swing a lot.
This may be when investors can take advantage of emerging opportunities. However, the adage, “time in the market beats timing the market” applies to shares and mutual fund investments.
There is more than one way of investing in commodities. One, you can invest in commodities directly. This can be done by physically buying commodities like silver and gold. Alternatively, you can go through the commodity exchange.
Two, you can invest in commodities by investing in stocks of companies that deal in commodities. An app like Cube Wealth gives you access to quality Indian stock advice with industry experts Purnartha.
Let’s look at some of the popular direct and indirect ways of investing in commodities:
1. Futures Contract
A futures contract is one of the most popular ways of investing in commodities. It is an obligatory contract between the buyer and the seller. It has a fixed price and a fixed date for trading a commodity in the future.
A futures contract ensures absolute transparency in transaction and acts as a hedge against inflation. However, it is still prone to risks arising from geopolitical tensions and natural calamities.
Exchanged Traded Funds (ETFs) are mutual funds that can be bought and sold as stocks. ETFs also allow investors to invest directly in futures contracts. However, they can invest in only one commodity.
3. Index Funds
Index funds are mutual funds that invest based on market index tracking. Investors can invest in commodity futures contracts and commodity-linked investment derivatives through Index funds.
4. Mutual Funds
Investors who do not wish to directly trade in commodities can opt for mutual funds that invest in stocks of the companies related to a commodity. It is less risky but gives fair exposure to how the commodities’ market works.
It is better to invest in mutual funds with advice from industry experts from Wealth First on an app like Cube Wealth. Download the Cube Wealth App to explore different types of mutual funds like:
Many traders also invest in stocks of companies dealing in commodities like gold, oils, cereals, natural gas, sugar, etc. Investors can go through these traders and invest in commodities indirectly.
How To Do Commodity Trading?
There are 3 main national commodity exchanges, where investors can engage in commodity trading. They are:
Multi Commodity Exchange (MCX)
National Commodity & Derivative Exchange (NCDEX)
National Multi Commodity Exchange of India (NMCE)
To invest in commodities listed on one of these or any other commodity exchange, investors need to:
Open a trading account.
Deposit money in the trading account.
Start buying and trading in commodities.
But investing in commodities and futures contracts may require daily price movement tracking that may be cumbersome for busy professionals. This is where an app like Cube Wealth can help.
Investing in the commodities market may be an option for investors to balance the risks of the volatile stock market. It may help diversify the portfolio with assets that bring high returns and offer hedge against inflation and market fluctuations.
At the same time, it may be risky for investors looking at long-term wealth creation. Commodities are subject to credit risk as well market-based risks (that are different than the risks associated with stocks and funds).
The commodities market has been known to be quite volatile. Therefore, a sudden dip in the price of a commodity can lead to big losses for investors.
Besides, there could be unforeseen risks and natural disasters, like a drought impacting crop prices, or an oil well collapse that may affect crude oil prices.
Investors who are looking for alternative investment options may consider investing in digital gold or explore (Peer-to-Peer) P2P lending in India.
Investing in digital gold by SafeGold on Cube Wealth is convenient, quick, and hassle-free. You can start investing in digital gold with just ₹1000.
Bhavna is a Business Economics graduate with over 10 years of writing experience. She writes on a variety of topics for Cube Wealth and helps simplify investment-related concepts with both short & long-form content.
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