Centuries ago, when stock markets did not exist, commodity trading kept people engaged in trade. People in those eras used to exchange agricultural goods, metals, and natural resources at designated marketplaces. Commodity trading is an ancient practice that continues to exist even in the age of digital trading. Be it crude oil, gold, silver or wheat, coffee, natural gas or cotton, they are all examples of commodities that are traded actively.
In India, commodity trading is regulated by the Securities and Exchange Board of India (SEBI).
In this article, we will understand the basic concept of commodity trading, strategies for beginners, and how to use research tools like technical and fundamental analyses.
Table of contents
What is a commodity?
A raw material or primary agricultural product that can be bought, sold, or exchanged in standardised contracts is called a commodity. They are different from company shares as they represent tangible resources that people use in their everyday lives or industries.
Also Read: Equity vs Commodity: Key Differences
Types of commodities
1.Agricultural commodities
Agricultural commodities are the ones which include crops like chana, bajra, soybean, jeera, rice, and livestock. The prices of agricultural commodities are often affected by weather, global demand and government policies. They are also known as soft commodities.
2.Metals
Scientifically a metal is an element that conducts heat and electricity and is typically solid, shiny and malleable. However, in commodity markets, metals are classified into two types, industrial and precious. While aluminium, copper and lead are essential for construction and manufacturing, precious metals like gold and silver are valued for investments. They are also called hard commodities.
3.Energy commodities
This category covers resources that fuel our daily lives, such as natural gas, crude oil and coal. Their prices are shaped by global supply and demand, economic trends and geopolitical events. While sometimes clubbed under hard commodities, energy is often treated as its own category.
Why begin with small losses
In commodity trading, beginning with small losses is considered both natural and important, because it allows you to learn without risking your entire capital. Commodities are highly volatile, and no matter how well you prepare, the reality of live markets often differs from theory. Early, controlled losses act like a tuition fee—they teach you discipline, risk management, and emotional control.
By keeping your trades and losses small at the start, you risk a smaller capital, potentially gain practical insights into market behaviour, and give yourself the time needed to refine your strategy.
The importance of research: Technical & fundamental analysis
If you are trading, but you have not done any research then you may be setting yourself up for potentially unfavourable outcomes. Trading without research is like sailing on a boat without a navigator. When evaluating investments and making trading decisions, there are two major approaches deployed for analysis:
Fundamental analysis
Fundamental analysis plays a key role in the toolbox of commodity investors:
- Studying supply and demand
To understand the price trends of a commodity, traders look at the long-term supply and demand. This study helps them potentially leverage these price trends.
There are several reports such as CPI (Consumer Price Index), PPI (Producer Price Index), GDP (Gross Domestic Product) and job data which give an idea about the health of the market and inflation rate. These are the factors that influence commodity prices.
Some commodities see higher demand in certain seasons and lower in others. Traders may plan their positions based on these seasonal shifts.
- Impact of government and trade rules
Government policies and regulations might raise or reduce commodity prices as they influence production and international trade. Knowing about these policies and regulations may help traders identify potential trends in commodity prices.
Technical analysis
Commodity traders use technical analysis to study commodities with a data-driven approach:
- Looking at candlestick patterns like double tops, wedges or triangles to spot market moves.
- Using indicators such as moving averages, RSI (Relative Strength Index) or MACD (Moving Average Convergence Divergence) to measure momentum and trends.
- Drawing trend lines, support, and resistance levels to identify possible entry and exit points.
Focus on a few sectors & stay informed
Since commodity trading involves a wide range of goods from different sectors, focusing on too many sectors may lead to a lot of confusion and divert your attention span. Beginners in commodity trading are often advised to focus only on a limited sector.
For example, a new investor may begin commodity trading with metals like gold and silver, as they are globally tracked and information related to them is easily available. Furthermore, any investor who has a knowledge or background of agriculture may do commodity trading in the agricultural sector. In similar fashion, those who have deep knowledge about international affairs may start commodity trading in crude oil and natural gas.
Just like choosing fewer sectors may ease the process of community trading, staying informed might give you insights on that particular commodity. It is advised to follow reliable sources related to that commodity to be able to make informed decisions.
Taking advice vs self-learning
A new trader often has a dilemma about whether to seek advice from a professional or learn the trade through research and analysis. Both approaches have pros and cons.
Taking advice
Pros
- Provides access to expert research and insights.
- Might save time in analysis.
- May help avoid common beginner mistakes.
Cons
- Advisory services generally come at a cost.
- No guarantee of accuracy in predictions.
- Risk of over-dependence on third parties without developing your own skills.
Self-learning
Pros
- Greater control over decisions.
- Deeper understanding of market dynamics over time.
- Helps in building a long-term, independent trading style.
Cons
- Requires significant time and effort.
- Initial mistakes may lead to potential losses.
- Information overload might be confusing.
Also Read: What is a mutual fund?
Conclusion
Commodity trading can be an engaging and potentially rewarding journey if approached with patience and discipline. Starting small, learning continuously and focusing on research are considered key steps for beginners.
FAQs
What defines a commodity, and what are common examples?
A commodity is a basic raw material that can be exchanged in standardised contracts. Examples include gold, silver, crude oil, wheat, cotton, etc.
Why is it important to expect small losses when starting out in commodity trading?
Small, early losses may help beginner investors to understand the importance of discipline, risk management, and emotional control.
How do technical and fundamental analyses differ, and which may beginners learn first?
Fundamental analysis looks at supply, demand and economic conditions, while technical analysis studies charts and price patterns. Beginners may potentially benefit from learning both gradually, to form a balanced view.
How many sectors may a new trader focus on, and why does focus matter?
It may be practical to start with one or two sectors, such as metals or agriculture. Focusing on fewer sectors might make the process simpler.
What are the pros and cons of using advisory services vs trading independently?
Advisory services provide expert insights but may be costly and create dependency. Self-learning builds independence but requires more time and effort. A balanced approach may help a beginner.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
Home
Contact Us
Login
Downloads
Schemes