Diversification is the ultimate goal of any investor based on specific risk tolerating asset classes. Among numerous investment avenues, almost every risk-allocated portfolio has investments in commodities as they have an inverse relationship with equities and bonds. As the prices of these securities fall, the prices of the commodities rise and vice versa. Furthermore, commodity trading allows investors to make hefty profits if the process is undertaken cautiously and backed by extensive research.
If you are intrigued by the idea of commodity trading, read on.
What is commodity trading?
Commodities’ trading involves trading in every kind of movable property other than actionable claims, money, and securities. These include gold, silver, and other metals and select agricultural commodities. Currency trading refers to the exchange of currencies, where the difference in the currency value is used to make profits. It is a huge market, with the traded value being higher than equities.
Types of commodities
Although there are hundreds of commodities to trade on any of the exchanges; the most common types of commodities are as follows:
| Commodity sectors | Constituents |
|---|---|
| Agriculture | Grains: Rice, Basmati rice, wheat, maize, jeera. Oil and oilseeds: Castor seeds, soy seeds, castor oil, refined soy oil, soy meal, crude palm oil, groundnut oil, mustard seed, cottonseed, etc. Spices: Pepper, red chili, jeera, turmeric, and cardamom. Pulses: Chana, urad, yellow peas, tur dal. |
| Metals and materials | Base metals: Aluminum, copper, nickel, zinc, tin. Bulk commodities: Iron ore, co*king coal, bauxite, steel. Others: Soda ash, chemicals, rare earth metals. |
| Precious metals and materials | Gold, silver, platinum, and palladium. |
| Energy | Crude oil, natural gas, Brent crude, thermal coal, alternate energy. |
| Services | Oil services, mining services, and others. |
What is the minimum amount required for commodity trading
Technically, there is no minimum capital for commodity trading. You can start with any amount based on your risk appetite and find the commodities you want to trade. How ever, some commodities such as crude oil are required to buy a certain amount, such as 100 barrels which can amount to a specific number you have to invest to trade. If you are low in capital, you can always look for commodities that do not require a specific quantity to be bought and start trading.
Best asset allocation for commodity trading?
Commodity trading can prove to be a great way to hedge against losses from other investment assets such as stocks and bonds. As an investor, you can allocate 5% to 15% of the total investment capital to commodity trading. However, it is wise to invest in commodities that you think would be present over the decades and can be deemed as essential—for example, pulses, crude oil, gold, etc.
How to start commodity trading?
All you need is a commodity trading account to start trading in commodities. IIFL has made it simpler to open a commodity trading account and start trading immediately. As one of the leading players in the broking space in India, we offer broking services in various categories of equity, commodities, currency, derivatives, and so on. These services are supported by a strong in-house research team and an excellent customer support system.
Trader Terminal, the proprietary trading terminal of IIFL, offers the convenience of trading in commodities by providing flexibility of access through a desktop application as well as a browser-based web application.
Due to its flexible process, there is no minimum capital for commodity trading. Once your account is opened, you can start trading with the capital you have. However, it is wise that you understand commodity trading in detail before you start trading. For this, you can peruse IIFL’s knowledge center which defines in detail the commodity trading process.
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Frequently Asked Questions Expand All
What type of investment is required for commodity trading?
There is no required investment for commodity trading. You can start with any amount you feel comfortable with. Once you know which commodity you want to trade, you can go ahead with the capital you have and start trading.
