Thinking about how to invest in commodity shares?
How can you get benefits by investing in commodity shares?
You will get all the answers to your questions in this article. We are going to discuss in detail the commodity shares and the role of the share market for your better understanding.
A short description of the share market is that the Share market is the place where buying and selling of shares are done at negotiable prices by the buyers and sellers. Various kind of securities of the company are traded in the market and on buying and selling of those shares and securities you will earn profit or sometime you might also face loss depending on your capability of understanding the market and making the investment accordingly.
This is brief about the stock market lest discuss commodity trading and many more things about it.
What is the commodity market?
A commodity is a marketplace where buying, selling, and trading of raw material or primary products. Commodity trading is divided into two parts that are hard commodities and soft commodities.
Hard commodities include natural resources that are mined or extracted from the earth. Some of the hard commodities are such as oil, gold, and rubber. Soft commodities include agricultural products or livestock. Some of the soft commodities are sugar, wheat, coffee, corn, soybeans, and pork.
Spot commodities market involves delivery immediately whereas derivatives market entails future delivery. Investors can also gain exposure by investing in the companies that have
exposure to commodities or direct investment in commodities via futures contracts.
Benefits of investing in commodities
There are so many benefits of making an investment in the commodity market. Let’s discuss some of them.
- Potential returns: Prices of the commodity used to fluctuate rapidly due to the factor of change in demand, supply, inflation, exchange rates, and the health of the economy. In recent times, it can be seen that there is a massive change in the demand and supply of commodities that have influenced the prices of the commodity shares. The positive side of the rise in the price of the commodity is that it has a positive impact on the stock of the companies.
- Diversification: Over time, commodity stocks and commodities tend to provide different returns from different stocks and bonds. Diversification does not help in gaining more profit and guarantee against loss.
- A boundary against inflation: Inflation is the situation that can affect the value of the bonds and stocks that means higher prices for commodities. It can be seen by the investors that commodities are showing strong performance in the period of high inflation. It should be noted that commodities can be more volatile than any other type of investment.
Types commodity trades
There is a wide range of commodities that are traded in the market let’s see some of them are:
- Crude oil
Types of commodities that are traded in India on Multi Commodity exchange of India are:
- Agricultural commodities: Castor seed, black pepper, crude palm oil, cotton, rubber, cardamom, Palmolein.
- Base metals: Lead, zinc, copper, brass, nickel, Aluminium.
- Bullion: Gold and silver
- Energy: Crude oil, Natural gas
Types of commodities that are traded in India on the National Commodity and Derivatives Exchange are:
- Soft: Sugar
- Fibers: Guar seed, Kappa’s, Guar gum, cotton
- Cereals and pulses: Barley, chana, wheat, maize, paddy, moong
- Spices: Jeera, turmeric, pepper, and coriander
- oilseed and oil: Soybean, cottonseed oil cake, crude palm oil, castor seed, refined soy oil
Commodity trading tips
Here you go with some of the best commodity trading tips and strategies that will help in earning greater profits and avoiding loss.
- Diversification: Investing in diversification helps in earning profits from different sources and it is also beneficial for avoiding loss. The factor that helps in determining the price of one commodity is different from those that determine the price of another commodity.
- Selecting appropriate exchange: It is important to choose the right exchange so that profits can be earned wisely. You must select the exchange that has ample liquidity. So that commodity can freely be bought or sold in the market without any kind of constant fear of finding a buyer or seller. It is important to choose the right commodity after tracking the past record of the share.
- Managing the volatility: Volatility is the degree of variation that can be seen in the prices of shares. That is the price on which the price of the share increases or decreases. Volatility will help in determining the return/risk profile of the commodities. More volatile the product is, higher returns will be generated.
- Understanding the cyclic nature of the commodities market: All commodities move in a cycle manner that can be determined by the interplay of demand and supply and other factors such as geopolitical and economic. For being successful it becomes important for an investor to know how to spot the stage in the cycle.
Trading of crude oil
The trading of crude oil covers the buying and selling of crude oil for making a profit out of it. It does not matter whether there is exchanging of physical commodities or speculation is to be done based on its market price. The oil market is famous because of the volatility caused by the change in demand and supply.
Crude oil tips for trading
Here you go with the few crude oil tips for trading that will help you in earning greater profits are as follows:
- Understanding the other investors: Professional and experienced traders and buyers have the full energy to dominate it into the futures markets. Retail traders and users used to exert less influence here.
- Learn about the movement of crude oil: Crude oil works according to the perception of the supply and demand that is affected worldwide output as well as global economic prosperity. In case of oversupply of crude oil and shrinkage in the demand, it will encourage traders and investors to sell the crude oil in the market.
- Reading the long-term chart: It is important to get a better understanding of crude oil from the past records so that investment in crude oil can be made smartly.
- Picking up the venue: Pick your venue wisely before investing in the shares. like NYMEX WTI Light Sweet Crude Oil this used to deal in futures contracts more than 10 million contracts per month and offers superb liquidity.