The Basic Guide to Currency and Commodity Trading

The Basic Guide to Currency and Commodity Trading

Apart from the agriculture sector, more than 50% of industries in India are directly or indirectly related to the commodity sector. It is here, in our country, that we focus more on equity trading rather than commodity trading, unlike the global phenomenon. Equity trading is gaining momentum, but many investors are slowly getting interested in trading in commodities and currencies.

Each asset class has a different dynamic to it. Price movements drive them all and it is important to understand how these movements affect these assets. Equity markets are driven by the ups and downs of the stocks. Commodities and currency markets are majorly influenced by macro-economic factors that drive demand and supply. For commodities, the factors are demand & supply, geopolitics, weather conditions, policies of trade etc. Currency trading is affected by geopolitics and other such macroeconomic factors. Trading in commodities and currencies gives you a chance as an investor to trade on a global level.

This basic guide on commodity and currency trading in India will give you relevant insights such as what is commodity trading and currency trading, benefits of the two, and what are currency derivatives.

Commodity Trading

We deal with commodities in our day-to-day lives, in some way or another. These commodities are traded in the commodities market. A commodities market is where the buying and selling of commodities happen. There are hard commodities such as gold, silver etc. Soft commodities are agricultural products such as wheat, sugar, cocoa, coffee etc.

Currently, there are some 50 major commodity markets all over the world. These markets facilitate trading in more than 100 primary commodities. One direct way of investing in commodities is by buying a futures contract. There are 3 types of players in the commodity market.

1. Hedgers

Hedgers are either commercial producers or consumers the commodity which is traded. For e.g., oil companies, farmers, jewelers etc. These hedgers use the futures contract to hedge the risk. This use of commodity derivatives saves them from huge risks. They have a very low risk appetite.

2. Speculators

These are one of the most sophisticated and leading players in the market. Just as investors speculate on the stock prices, here these speculators play on the prices of the commodities. This is an investment option for them. They speculate based on the price movements hoping for gains.

3. Arbitrageurs

These players try to gain from the price differences in similar commodities but in two different markets. They buy the commodity from the market where its prices are low and sell it in a market where its prices are high. The difference is the profit they earn. These kind of transactions are usually risk-free.

Benefits of Trading in Commodity Markets

There are many benefits of commodity trading.

  • Helps diversify portfolios
  • Is less volatile than equity trading
  • Gives exposure to global markets
  • Protects against inflation
  • High liquidity
  • Lower trading margin
  • Sufficient time to react to global events
  • High gains as compared to equities

Currency Trading

Currency trading or as it is also known as foreign exchange or FOREX is where you purchase and sell currencies in the foreign exchange market. It is the largest trading market in the world where $2 trillion are traded on a day-to-day basis. The Forex market is made up of Banks, investment firms, forex brokers etc. A specific country’s exchange rate is typically affected by its supply and demand in the international foreign exchange market.

You can trade in currencies through a currency derivative. A currency derivative is a futures contract wherein you can you can exchange one currency for another at a specific date in the future, at a fixed price as on the date of purchase. A currency future is also known as an FX Future. A currency future helps you to hedge against currency movements.

In India, you can trade in derivative currencies and hedge against currencies such as dollar, pound, yen, and euro. Usually, the trading is settled in cash in INR. SEBI has recently sanctioned cross currency contracts trading such as euro-dollar, pound-dollar and dollar-yen.

Benefits of Trading in Currency Derivatives

  • You can use hedging and save yourself from potential losses by taking proper positions at the right time
  • Currency futures lets you speculate on short term currency movements in the market
  • Through arbitrage, you can make profits by the differences in currency exchange rate in different markets and exchanges
  • You only need to pay a percentage of value known as the margin amount instead of the full trade value to trade in currency derivatives

Benefits of Currency Trading

  • A highly liquid market where you as a trader get the freedom to enter or exit anytime
  • The number of currency units per lot is called a lot size. These sizes are fixed. Traders have the liberty to trade in as many lots per contract
  • There cannot be any favored altercations or manipulations in the market
  • Make a diverse portfolio

Currency trading and commodity trading is still a new concept for Indian investors. You can follow the basics mentioned below and consider trading in currencies and commodities.

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