How To Start Trading Commodities: Process, Types, Advantages And Disadvantages

How To Start Trading Commodities: Process, Types, Advantages And Disadvantages

It is easy to start with commodity trading, as it's almost like a stock transaction, and even the screens are similar. Whether you want to speculate on price movements or hedge using an underlying position, that's all you need to know about how to invest in commodities.

Taking a speculative position in commodity futures is a way to invest in commodities. By placing investment on commodity options, you can also invest in commodities. By accepting delivery of the original commodity, you can also invest in hedged commodities. Precious metals, oil, natural gas, industrial metals, and agricultural commodities are all commodities you can invest in.

This article will inform you about commodity trading, like how to start trading commodities in India or invest in commodity trading. Let’s move ahead.

How To Start Trading Commodities?

The commodity is the primary material for producing goods consumed daily. Commodities such as oil, sugar, metals, and so on form the foundation of an economic system worldwide. Some of the most widely traded commodities in the world are gold, corn, crude oil, coffee, wheat, etc. The movements of one commodity affect the world as a whole. Whenever the price of oil goes up, it has an impact worldwide.

To start commodity trading in India, you need to follow only two basic steps;

1. Register a Demat account with the Reputed Stockbroker: 

You need to have a demat account if you want to trade stocks, and it's necessary for commodities trading. While many broking firms can open your account, choosing a firm that will give you relevant business advice is essential. You must have appropriate input and guidance to navigate the commodity market maze.

It is also essential to choose a broker offering competitive rates. You can lose your gains if you choose a broker with a high commission. Visit the broker's platform to find out about its services. If you have a team of experts who regularly offer in-depth research and recommendations, it is wise to choose a full-service broker.

2. Deposit an initial amount: 

You must make the initial payment when you open an account. The deposit amount depends on the commodity you are dealing in and is generally between 5% and 10% of the contract value. The official web page of the brokerage house provides you with this information. If losses are incurred, you need to maintain an appropriate coverage margin. Creating a commodity trading plan that helps you comprehend the markets and your risk appetite is also significant. Regarding risk preferences and cash flows, each trader has a distinct point of view. You're choosing based on your finances.

Open Demat Account

Table of Content

  1. How To Start Trading Commodities?
  2. Various Ways To Start Trading In Commodities
  3. Advantages Of Commodity Trading
  4. Disadvantages Of Commodity Trading
  5. Conclusion

Various Ways To Start Trading In Commodities

Commodity trading can be done in several ways. These include:

1. ETFs and Mutual Funds for commodities: 

Many exchange funds and mutual Funds are based on commodities. You can invest in exchange-traded funds of gold and silver, such as when you want exposure to gold or silver. ETFs are not subject to purity or storage-related problems, as they are held electronically in your demat account.

2. Direct Investment: 

This is a common way to invest in commodities. In other words, items like gold and silver can be purchased in the form of coins and jewels by direct purchase. Nevertheless, a high transaction price is to be paid for directly investing in these items. The issue of storage and purity is also raised.

3. Purchase Stocks: 

This is another way of dealing with commodities. For example, you can buy stock in an energy company to trade in energy. Energy prices will have a strong influence on the stock price. There is a chance of profit even if the commodity does not do well when you invest in commodities through direct stocks. For example, if you have purchased shares in an established energy company that is doing well based on its solid fundamentals, you can still profit even when prices are falling.

Advantages Of Commodity Trading

There are different advantages of commodity trading, as mentioned below;
 

1. Portfolio Diversification - If you want to diversify your portfolio and cover losses in stock prices, the commodity markets or investments will provide some protection. You have diversified your assets and managed the risk and reward with this approach.
 

2. A Protective Measure Against Inflation-  Stock markets often experience drops during periods of rising inflation because borrowing becomes more expensive for businesses and negatively influences profits. Trading in commodities is at its best when this occurs because commodity prices rise. Trading in commodities is beneficial at these times because of this situation.
 

3. Transparent Transactions - Online dealing in commodities is heavily governed by rules. The security precautions are suitable, and there is no possibility of manipulation in your trading operations. An element of participation at the board level is fair pricing on commodity markets and a code of morality for trade.

Disadvantages Of Commodity Trading

There are some disadvantages to commodity trading as well, Have a look below:

1. Price volatility - The price of commodities can be very volatile. It depends mainly on supply and demand and external factors, such as geopolitical events, natural disasters, and political situations. These events could quickly affect the prices of commodities on the market. Consequently, it is difficult for investors to analyse a price in detail, and there is no way of eliminating all risks.

2. Environmental issues - Commodities investors in commodity markets significantly harm the environment. Some suppliers and manufacturers take unethical measures to meet increasing demand and supply, which may damage the environment.

3. Speculation- As commodity trading is a very volatile investment tool, investors are attracted to the possibility of short-term profits with an extremely short time horizon. Therefore, fluctuations in commodity prices are due to the constant mass movement of such speculators.

Conclusion

You can access an entirely new market as an investor through online commodity trading. Commodity trading is more reliable than the stock market, according to several experienced investors and experts. But investors in the stock market feel that equity stocks are more profitable than commodities, making them easier to understand.

The blinkX online trading app was developed to make trading easy and accessible. With its user-friendly interface and powerful features, invest within a few minutes. You can invest in Indian stocks, Mutual funds, and Initial Public Offerings by signing up entirely paperlessly.

How to start trading commodities FAQs?

There is no established minimum capital requirement for dealing in commodities in India.

Once you have researched and identified your valuable investments, you can start trading commodities by opening a brokerage account and buying shares in unique commodity companies or Commodity Exchange Traded Funds.


 

Therefore, you do not have to pay capital gains tax if you profit from selling commodities in India. In contrast, as provided for in the Income Tax Act, you must add all profits to your company's income and pay tax according to the relevant tax rate.

Divide the total cost of buying this commodity by the overall revenue from selling it to calculate profit. Subtract the total revenue generated by selling the commodity from the purchase cost to calculate the loss.

Trade in commodities often involves leverage, enabling traders to use more funding than is available within their account. This can raise the potential profit and increase the risk of substantial losses when a trade is carried out against an investor.