In the online trading world, commodities refer to tradeable things that generate profits for traders across the globe. The four broad categories are:
- Metals (zinc, lead, copper, aluminium, steel, nickel)
- Bullions (precious metals like gold, silver, platinum)
- Agricultural (sugar, cotton, wheat, coffee, spices, pulses)
- Energy (gasoline, crude oil, natural gas, heating oil)
Commodity trading speculates the change in the price of commodities owing to several macro-economic and environmental factors such as the country’s economic conditions, weather, government trade policies, geopolitical conditions, etc.
The main benefit of online commodity trading is that it diversifies your trading portfolio and hedges it against volatile market conditions, such as high inflation or currency devaluation.
Also, commodities form an underlying asset in a standardised futures contract (an agreement to trade a product at a pre-settled price in the future), thus making the trading less risky than the equity market.
It is the buying and selling foreign currencies in the global forex (foreign exchange) market by forex brokers, banks, and financial institutions. The buy or sell rate is the currency’s exchange rate determined by the demand and supply forces, and the currency traders make capital gains from the rate differentials. Geopolitical and macroeconomic trade factors, such as interest and inflation rates, mainly drive price movements in currency markets.
Forex online trading takes place in currency pairs. It evaluates the appreciation (going up) or depreciation (going down) of the currency value against another currency. Similar to commodity trading, trading in currency also diversifies your investment portfolio and hedges against market risks.
Likewise, the currency value forms an underlying asset for currency derivatives or futures contracts (an agreement to exchange currencies in a specific pair in the future). These contracts can be beneficial if you are an importer or an exporter who wants to hedge the business against currency exchange rate risks.
Owing to the global reach of the currency trading market, it is far more extensive and evolved than the commodity market. It provides the trader with more liquidity and freedom to enter or exit anytime. However, the unpredictability of the movements of currency exchange rates makes it a high-risk market.
Choosing Between the Two
To start trading, you need a Demat account. The Demat account needs to be linked to your bank account to facilitate the deposit and withdrawal of funds.
Both commodity and currency trading are surfacing as profitable online trading options for market-savvy traders. Each investment class has risks and rewards associated with them. As a new entrant in the trading market, you need to invest your time and capital to learn the trade tricks.
Essential decisive factors in choosing between the two are –
- The capital you are ready to invest (commodity trading requires more capital investment than currency trading)
- The risk you are willing to bear (both trading forms involve risks)
- The time you need to start trading (to study the dynamics of the demand and supply forces or to analyse the currency pairs)
While you can exchange commodities within the daily market limits, currencies can be traded over the counter with lesser regulations, giving you more control over your online trading activities. With almost no scope for manipulation, the currency trading market forms a distinct asset class for astute traders like you.
Thus, when contemplating choosing the online trading path, go for the one that gives you more liquidity and control with lesser risks.