Investing in commodities helps diversify your overall investment portfolio, which means that the allotment of funds is broadened. This helps create a balanced portfolio and also helps mitigate the chances of any unwanted risk, generally associated with equity investment. Moreover, investment in commodities acts a cushion against future inflation as the commodity trade generally increases in volume during times of high inflation. Also, commodities constitute an economically cheap category of investment vehicles when compared to other future based alternatives.

Financial specialists emphasize the need to include commodities in your trading portfolio because they act as a hedge against inflation and at the same time, diversify your fund allocation to increase the degree of safety of investment. Therefore, commodity trading is fairly safe and low risk mode of trading.

It all depends on what your specific goals are. Equity markets in India and elsewhere are known for the higher rate of returns over a period of time. However, equity stocks come with a higher volume of risk as well, when compared with commodity trading. On the other hand, the earnest profits in commodity market are lesser, but so is the risk involved. If you prefer high risk trading, then equity is the right channel for you. On the other hand, if you prefer low-risk but steady ventures, then you should allot more funds towards commodities.

1. He/she must be well versed with the technicalities involved in pricing mechanisms of commodities.
2. He/she must be aware of the global scale supply-demand ratio of the commodities.
3. He/she must have the required dedication and patience to gradually divulge and create a sustainable trade base.
4. He/she must have the ability to take informed and quick decisions and must be able to make strategies as per the market dictums.

Commodity trading proves beneficial in several ways. Firstly, traders benefit from the inflation of commodity prices. During inflation, the cost of commodities and raw materials increase substantially, which helps commodity traders book maximum profits. Traders can also hedge their commodity portfolios against a declining USD and save their assets. Furthermore, they can take advantage of various socio-economic and geopolitical events and uncertain global and economic periods, during which time the supply of goods is constricted. They can speculate or hedge their trades and book significant profits resulting from shortages.

The ‘commodity futures contract’ is the agreement that a trader will buy or sell a certain amount of their commodity at a pre-decided rate at a certain time. When a trader purchases a futures contract, they are not required to pay the whole price of the commodity. Instead, they can pay a margin of the cost which is a predetermined percentage of the original market price. Lower margins mean one can buy a futures contract for a large amount of a precious metal like gold by spending only a fraction of the original cost.

• Protection against inflation, stock market crash and other black swan events: When inflation rises, it makes borrowing expensive for companies and impacts their profit-making abilities. As a result, stock prices fall during a period of high inflation. On the other hand, the cost of goods increases, meaning the price of primary goods and raw materials would rise, causing commodity prices to move higher. Hence, when inflation is rising, commodity trading becomes profitable.
• High leverage facility: Traders can accentuate their profit potential by investing in the commodity market. It allows traders to take a significant position in the market by paying a 5 to 10 percent margin. This way, even an insignificant price increase can increase profit potential exponentially. Although the minimum margin requirement varies from one commodity to another, it is still less than the margin required in equity investment. There is affordable minimum-deposit accounts and controlled full-size contracts
• Diversification: Commodities allow investors to diversify their portfolio as raw materials have a negative to low correlation with the stocks.
• Transparency: The commodity market is developing and highly regulated. The modern electronic trading suite has added to the transparency and efficiency of the market, eliminating any risk of manipulation. It enabled fair price discovery by broad-scale participation.

• Leverage: It can be a double-sided sword, especially if you are inexperienced in margin trading. Leverage, as discussed before, allows traders to bid big in the market. If the margin is 5 percent, then one can buy commodity futures worth Rs 100,000 by paying only Rs 5000. It means that with the slightest fall in price, traders can end up losing a significant amount.
• High Volatility: Higher returns from commodity trading is due to the high price volatility of commodities. The price is driven by the demand and supply when the demand and supply of goods are inelastic. It means despite changes in price, supply and demand remain unchanged, which can significantly alter the value of commodity futures.
• Not necessarily immune to inflation: Despite the negative correlation between securities and commodities, the latter is not suitable for portfolio diversification. The theory that commodity price moves in the opposite direction with the stocks doesn’t hold as experienced during the economic crisis of 2008. Increasing inflation, unemployment, and reduced demand halt companies production and impact demand for raw materials in the commodity market.
• Low returns for buy-and-hold investors : Commodity trading needs bulk investment to generate significant returns. The Bloomberg Commodity Index, which is considered the gold standard, showcased that even the most secured government bonds have historically garnered more returns than commodity trading. It is primarily because of the cyclical nature of the products, which erodes the value of an investment for buy-and-hold investors.
• Asset concentration: Even when the primary reason to invest in commodities is to diversify the portfolio, commodity investment tools often concentrate on one or two industries, meaning a higher concentration of assets in one segment.