Pros and Cons of Commodity Trading
Trading commodities include metals, energy, agriculture, and livestock. Our daily needs depend on these freely traded commodities. NCDEX and MCX revived commodity trading in India. Understand the pros and cons of this market before entering.
Advantages of Commodity Trading
Protection Against Inflation:
As an inflation hedge, commodity trading is beneficial. Demand for goods and services raises raw material prices. This correlation means that while stock prices fall during inflation, commodity prices rise. Investing in commodities futures can help preserve capital in such situations.
Hedge Against Political Tensions:
Commodities also protect against geopolitical tensions. War or conflict can disrupt supply chains, causing scarcity and a sharp rise in commodity prices. Such events may hurt stock markets, but commodities often rise, offsetting losses in other investment areas.
High Leverage:
High leverage lets you control large positions with little capital in commodity trading. By paying 5% or 10% of the contract value, even small price changes can yield big gains. For investors seeking high returns, commodity trading is an attractive option due to leverage.
Disadvantages of Commodity Trading
Leverage Risks:
Leverage magnifies gains and losses. Small price drops can cause significant financial losses, exceeding your initial investment. Low margin requirements can encourage excessive risk-taking, which could cost you your investment if the market turns bad.
Volatility:
Supply and demand drive commodity prices, which are volatile. Supply is inelastic, so crops and metals remain available even if prices change. This volatility makes commodity trading risky due to market uncertainty.
Limited Diversification:
Despite popular belief, commodities are only sometimes a good counterbalance to stocks. During the 2008 financial crisis, oil and gas prices fell alongside stocks, challenging the idea that commodities always diversify.
The Bottom Line
Commodity trading offers the potential for significant financial growth, but it also comes with substantial risks. The high leverage and volatility associated with commodities can lead to both large gains and large losses. Therefore, it’s crucial to thoroughly research and prepare before engaging in online commodity trading. While commodities can enhance your investment portfolio, they should be approached with caution, especially if you’re relying on them for diversification.
Want to know more about Commodity trading? Stay tuned for our
Live AMA: Commoditiies Unlocked on 17th, September, 3.30 PM onwards.
Commodities Unlocked: Live AMA with Angel - Ask Me Anything (AMA) Hub - Angel One Community
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.