A commodity is any item that can be sold and purchased in the market. There are two ways to invest in commodities in India: physical and financial markets. In the Physical Market, you directly buy the commodity. For example, if gold is your commodity, you can directly invest in it by buying gold ornaments. However, the storage and purity of gold ornaments are a concern. In such cases, you can invest in the Financial Market.
A Commodity Market allows you to trade in commodities. Over the years, the concept of the Commodities Market has evolved and popularised. Since commodity prices are subject to change, you can earn good profits by investing in such a market. The array of commodities you can invest in has also diversified. Let us learn the different ways you can invest in commodities.
Types of commodities
Before we understand the ways to invest in commodities, we should know the types of commodities. A basic idea of the commodity you plan to invest in and reviewing the market standing are necessary to make an appropriate investment. Commodities can be broadly classified as hard and soft. Hard commodities are generally raw materials that are used to manufacture other goods. Energy, precious, and base metals are examples of hard commodities.
Soft commodities are used for initial consumption. Agricultural products such as wheat and rice are the most popular examples of soft commodities. Both commodities are listed and traded on the market.
Different ways to invest
Following are the ways you can make a Commodity Investment:
The most traditional way to invest in commodities is direct. As mentioned in the gold investment example, you can directly invest physically in the commodity.
You can invest in commodities through stocks. For example, if your choice of commodity is energy, you can invest in energy companies listed on the Stock Market. The share value depends on the commodity price. However, you can make profits even if the commodity price drops. This is possible due to the strong fundamentals of the company invested.
Contracts are the most popular way of investing in the Commodity Markets. There are two types of contracts: Future and Options Contracts. With Future Contracts, you need to buy or sell your commodities at a fixed price on a specific date. With Options Contracts, you have the right and are not obligated to buy or sell your commodities on a particular date.
Through ETFs and Mutual Funds
You can also opt for Commodity Trading through Exchange-Traded Funds and Mutual Funds. For example, if you want to invest in crude oil, you can invest in related ETFs and Mutual Funds units. These investment units can be bought and redeemed easily. The investment choice reaps attractive returns when the Commodity Market positioning is favourable and vice-versa.