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In India, the stock market gets a lot of attention, but we often overlook the potential of other trading avenues, such as commodity and forex trading. It’s surprising because globally, these markets often see more action than stocks.
Now, things are changing in India too. Commodity and forex trading are becoming more popular, offering new opportunities.
But what’s the difference between forex trading and commodity trading? Well, both are unique, with their own pros and cons. It’s like choosing between two paths. To figure out which one suits you best, let’s explore the basics of commodity vs forex trading.
What is commodity trading?
Right now, there are about 50 famous commodity markets worldwide. These markets allow traders to trade in about 100 different primary commodities. Commodities can be sorted into four groups:
- Energy: It includes heating oil, gasoline, natural gas, and crude oil.
- Metals: It includes zinc, copper, nickel, lead, etc.
- Agricultural produce: It includes commodities such as sugar, cocoa, castor seeds, cotton, coffee, cardamom, black pepper, etc.
- Bullion: It includes metals like gold, silver, and platinum.
Trading in the commodities market involves derivatives trading, such as options and futures contracts, with futures being highly popular and widely used.
In a futures contract type, a trader commits to buying a contract of a specified commodity as an underlying asset at a predetermined price, while the seller is obligated to execute the contract on a future date. This locks in the current market price, and trades can benefit from the difference.
Notable commodities exchanges in India include the Multi-Commodity Exchange of India Limited (MCX) and the National Multi-Commodity and Derivatives Exchange of India Limited (NCDEX). Traders can participate in these markets from Monday to Friday in two sessions, morning (9:00 am – 5:00 pm) and evening (5:00 pm – 11:30 / 11:55 pm).
What is forex trading?
Forex trading, or foreign exchange (FX) trading, involves the exchange of one currency for another. It stands as one of the most dynamic markets globally.
Participants in forex trading include companies, banks, investment firms, hedge funds, and forex brokers. Exchange rates are influenced by the demand and supply dynamics of each currency, which, in turn, are impacted by factors such as inflation, interest rates, political scenarios, and economic strength.
Traders in the forex market enjoy a range of choices, trading through spot, forwards, and futures markets. Unlike futures markets, where delivery occurs at a later date, spot markets involve immediate exchange of currencies at the prevailing market price at the time of the transaction.
Some of the leading forex trading marketplaces include:
- United Stock Exchange (USE)
- National Stock Exchange (NSE)
- MCX-SX
- Bombay Stock Exchange (BSE).
In the Forex market, the trading can take place only in pairs and often has leverage benefits. Some of the commonly chosen currency pairs in India are (USD/INR),(USD/JPY), (EUR/USD), (EUR/INR), (JPY/INR), (GBP/USD) and (GBP/INR). The Forex trading market opens Monday to Friday from 9:00 am to 5:00 pm, with cross-currency trade continuing till 7.30 p.m.
Do you want to know how to trade commodities in Forex? Unlike cash and equity, you need to open a demat account to join this market. To trade in the forex market, it’s essential to have a trading account with a broker.
Difference between forex trading and commodity trading
Both forex and commodity trading markets have some similarities and differences to be considered. Here are the differences between forex trading and commodity trading:
Liquidity
Forex trading is generally more liquid due to the constant global activity in currency markets. The vast size and widespread participation contribute to high liquidity, allowing traders to execute orders quickly.
On the other hand, commodity trading liquidity varies, influenced by the specific commodity and market conditions, with some commodities having more active and liquid markets than others.
Market focus
Forex trading involves exchanging different currencies, where traders speculate on currency strength, like the US dollar.
Commodity trading, on the other hand, deals with buying and selling physical goods or contracts representing them, such as gold or oil, based on supply, demand, and economic factors specific to each commodity.
Risk and volatility
In Forex trading, risk and volatility are influenced by economic and political events, with varying levels among currency pairs.
In commodity trading, price fluctuations are driven by factors such as weather conditions, geopolitics, and global economic trends, posing distinct risks tied to the specific commodities being traded.
Depending on these factors, traders choose whether they wish to trade in the commodity market or the forex market. For individuals looking to reap the forex commodity benefit at once, Canadian, New Zealand, and Australian dollars are based on commodity prices (gold and crude oil). Trading in these currencies can grant the traders benefits of both markets simultaneously.
Here is a snapshot table for your reference to understand the difference between forex trading and commodity trading.
| Characteristics | Commodity trading | Forex trading |
| Security | Commodities include energy, agricultural produce, metals and bullion | Currencies include rupees, dollars, euros, etc. |
| Liquidity | It is less liquid since trade is in commodities | It is more liquid since trade is in the currency itself |
| Regulation | Tightly regulated via an exchange | Loosely regulated via banks or brokers |
| Trend Prediction | Prediction is easy due to seasonal factors | Difficult prediction due to high volatility |
| Days and Timings | From Monday to FridayMorning session: 9:00 am – 5:00 pmEvening session: 5:00 pm – 11:30 / 11:55 pm | From Monday to Friday9:00 am to 5:00 pm with cross-currency trade till 7.30 p.m |
Conclusion
Commodity and forex trading are distinct markets with unique features. Forex involves exchanging currencies affected by economic factors. Commodity trading deals with tangible goods influenced by supply, demand, and specific commodity dynamics.
As a result, trading commodities vs forex comes down to a personal choice and asset management technique. To learn more about trading, subscribe to StockGrow blogs!
FAQs
Forex trading primarily deals in currencies. More specifically, forex trading involves trading in currency pairs, while commodity trading involves trading in raw materials that are required to manufacture or make finished goods.
Firstly, you need both Demat and trading accounts to get started. The trading account you choose must match the guidelines as per the regulatory bodies such as the SEBI. Once you have your accounts ready, choose the currency pairs you want to trade. Always ensure that you do sufficient research before you build your trading strategies.
The risk factor is highly debated in trading commodities vs forex. In reality, commodity markets are subject to many more changes because they are influenced by factors like the weather and seasons compared to the forex market. As a result, in some cases, commodity markets can be less liquid than the forex market. That being said, both these markets have their own fair share of risks.
There are two types of margins that need to be maintained to open and maintain commodity positions in the market. An initial margin is required to enter the position while a maintenance margin, which is usually a certain percentage of the initial margin, is required to maintain the position and cover for any losses.
Forex trading offers a higher leverage, implying that the possibility of making large profits is better in forex markets. However, if the market trends reverse, you will end up with substantial losses as well. Therefore, research carefully before you start trading.