How to invest in the commodity market? A guide

Deepika Chelani
Updated: 15 Dec 2021, 12:51 PM IST
TL;DR.

Commodity investing and trading differs significantly from other types of investments. To trade in commodities, investors tend to go via futures & options. Let us understand this in detail here

One can use a future contract or option contract to start trading in the commodity market.

One can use a future contract or option contract to start trading in the commodity market.

Commodities or goods that we are using in our day-to-day life, such as food, metals, energy, etc. are a category of products which contribute to the effective functioning of everyday life. It is tradeable in nature or can be purchased and sold in simple words.

The investment of commodities or the trade in commodities is quite different from other forms of instruments. One should strive to invest part of the money on commodities for adequate portfolio diversification, as this asset class is likely to benefit economic cycles.

In the context of the significant reforms in the Indian economy, Indian commodities exchanges are undergoing a sea shift and are likely to result in massive trade volumes in this area.

Investors can use a futures contract or options contract to invest in commodities markets. Whereas a futures contract requires participants to sign a certificate stating that a product be subsequently delivered at a predetermined price, an options agreement operates as an agreement, but is not responsible for it. Let us discuss them in detail.

Future contracts

In the commodities market, future derivative trade is most frequent where sellers make a futures agreement with dealers/purchasers for the purchase of a specified amount of items at a specified price. Although a decline in market prices might assist sellers achieve marginal profit, a rising price can allow buyers and brokers to take advantage of deals. If such trading is controlled by the exchange of commodities, it is recognized as a future derivative contract.

Commodity futures are normally intended to protect product manufacturers from the risk of fluctuating commodity prices before the commodity is ready to be delivered during manufacturing. Also, the future market attracts speculators because of its enormous leverage, as any minor price increases may lead to considerable profits. 

On the other side, there might be large losses due to a modest price drop. However, speculators are also intended to increase liquidity in the market and make sure that adequate buyers and sellers are available.

Options contracts

Since 2017, SEBI laws may exercise options trading while investing in top products in which traders have the right to acquire/sell goods derivatives at a set price, not the duty to purchase. Commodity investment by such agreements helps individuals to gain from any variations in the market, as, depending on the kind of option contract, no obligation is imposed upon any of the parties with regard to the purchased or sales of items.

The option contract provides the right for the trader to forget the deal if it does not support the trader's interests or if it exercises his right to buy or sell the commodity when this is a benefit to him, unlike future terms in which the dealer is required to comply with the provisions on the contract for the purchase and sale of a commodity on a given date. You achieve this by setting an option premium minimal amount.

Conclusion

Sebi is the commodity regulator, and you need a demat and a trading account to move with it. It is beneficial to observe Sebi-style and stock exchanges from time to time including the circulars, directions, rules and regulations. While investment in the commodities market may generate big profits, considerable knowledge is needed.

However, anybody can swap things by registering with the broken goods through any recognised commodity exchange. A solid groundwork or quality learning is a requirement in order to succeed ,whether it's a business or the development of a financial portfolio. Hence, it is advised to do extensive research before investing in the commodity market.

 

First Published: 15 Dec 2021, 12:51 PM IST
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