Ever since the widespread diffusion of financial literacy in India, commodity trading has been a parallel trading option alongside the traditional market of securities trading. Commodity trading involves exchange, sale and purchase of stocks related to edibles, metals, precious metals, agricultural produce or energy etc.
Traditionally, commodity trading has had a long history and even before a streamlined system was set in place, commodity trading activities were being carried out. With the advent of modern technology, the field of commodity trading has been impacted too and this has induced rapid changes in the way commodity exchange is conducted these days.
Demand and Supply
The principle of demand and supply is the principle platform that forms the basis of profitability in commodity trading. The variations in the demand and supply curve drive the pricing strategies and as a result of this, the profit margins tend to vary accordingly. The variation can be understood by the simple fact that when the prices are higher, the demand for any particular commodity tends to decline. Conversely, a low supply of any commodity means that the prices will be higher.
The pricing mechanism for commodity trading continues to fluctuate and facilitates a macro view of demand and supply of any commodity at any given time in the market. This implies that at the current price of any commodity, demand and supply curves tend to fluctuate until a point of balance is reached when the demand equals supply.
At this particular point, the market is said to be in a balanced state or a state of equilibrium where prices of that particular commodity do not fluctuate. However, this is an ideal corollary as price fluctuations, especially at times like these, drive constant changes in commodity trading.
Commodities like precious metals in India have been historically traded for their high traditional value. Commodities like gold and silver form an important segment of commodity trading in India, with their specific utility as a cushion or a reserve against changes market prices. This is especially true of gold, which is often seen and invested as a hedge in times of sudden increase in the cost of living index and is hence seen as a viable retention instrument.
Then there are commodities like crude oil, natural gas etc., the prices of which are driven more by the global supplies from oil-producing nations. However, in recent years, on account of the widely recognized fall in oil supplies and the fast-emerging market of non-conventional energy resources like solar power, the prices of oil stocks have continuously risen and this trend is expected to continue soon as well. Besides, the supply of non-renewable energy resources comes under a broad scanner of global protocols.
Agricultural commodities in India form the bulk of stock trading channels and have traditionally offered stable if not high volumes of profitability. Commodity trading in agricultural stocks is a trading mode often pursued by those who wish to accumulate a steady inflow of profits over a long period. This is because the stock deal incubation time and the time required to establish oneself in agricultural trading is long.
When it comes to commodity trading, the impact of inflation is something that forms one of the basic factors for setting the pricing mechanism. This is evident in our day to day livelihood as well. The price variation in commodity trading, especially in agricultural commodities depends on multiple factors like administrative policies, the supply of the stock, weather conditions, storage conditions, conditions like the on-going pandemic etc.
This is why although commodity trading in certain commodities, especially the ones with a limited shelf life, maybe a good idea for diversification of the trading portfolio, but must not form the major channel for overall investment.
At any time, the due consultation of a firm like Tradebulls is required to ascertain the best possible choices of investment that you may find suitable. After all, given the overall unpredictable nature of commodity trading and pricing, it is important that the services related to pricing strategy, the timing of entry and exit from a trade deal, market pricing forecasts etc. are taken into account.
This will enable you to have a bird’s eye vision of what your trade portfolio must look like and how it can be matched with your specific financial needs. To understand more about the way commodity trading functions in India, connect with our advisors at firstname.lastname@example.org or 022-40001000.