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FX and commodities are vastly different. But they both offer profitable trading opportunities if played correctly.
India has one of the world’s fastest-growing economies and a thriving financial sector. Forex and commodity markets in India have grown significantly.
Foreign exchange and commodity trading involve buying and selling currencies and goods worldwide. Both commodity and forex trading have pros and cons and require different strategies.
In this article, we’ll compare India’s forex and commodity trading fundamentals.
Understanding the FX market: What is forex trading?
Foreign exchange trading (forex) involves exchanging one currency for another. FX trading can facilitate business, tourism, and global trade. Several purposes, including business, tourism, and facilitating global trade, may be carried out through FX trading.
Exchanging currencies in pairs in the FX market allows traders to speculate on whether one currency will rise or fall. Speculators buy or sell currencies to profit from their price fluctuations. Hedgers may do so to protect their accounts if their currency holdings fall.
Financial institutions like banks, companies, investment firms, hedge funds, and retail traders benefit from the forex market.
The FX market, open five days a week, is the largest financial market worldwide. The forex market lacks a central exchange because all trading is done electronically over networked computers.
If you’ve travelled abroad or ordered shoes or clothes, you’ve probably already engaged in the foreign currency market.
Demand and supply drive FX. If Japanese investors buy British Pounds with Yen, the Pound will rise and the Yen will fall. GBP/JPY is the only currency affected.
How does forex trading work?
In forex trading, you purchase an asset with a currency just like in any other transaction. Foreign exchange traders use market prices to determine how much currency to buy.
For example, the EUR/JPY market price shows how many Euros are needed to buy one Japanese Yen. All currencies have a unique code that lets traders instantly identify pairings.
You might buy a currency if you think its value will rise, like in other markets. This is called “long.” Similarly, selling currency is best if you think its value will fall. In FX, this is called “short”.
Forex trading styles vary by time horizon. Forex traders include scalpers, day traders, swing traders, and position traders. Each style has pros and cons.
What is commodity trading?
Understanding a commodity is crucial before trading online. Although they can be used interchangeably, commodities and products are very different. Daily necessities like food, metals, energy, etc. are all examples of commodities. Goods, on the other hand, are consumable products, including jewellery or appliances.
Indian commodity exchanges allow traders to trade standardised contracts. SEBI regulates 6 major Indian commodity exchanges.
- National Multi Commodity Exchange India (NMCE)
- Indian Commodity Exchange (ICEX)
- Multi Commodity Exchange of India (MCX)
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
- National Commodity and Derivative Exchange (NCDEX)
One of the most famous commodities exchanges worldwide is COMEX. It is a section of the Chicago Mercantile Exchange (CME) Group. Metals, including copper, gold, silver, and aluminium, can be traded on COMEX. For COMEX commodities, primarily used for hedging, deliveries are uncommon. COMEX is only a middleman and does not supply metals.
For years, commodity trading has driven global commerce. Commodity trading uses real assets like crude oil and agricultural products, not stocks or bonds. Indian commodities trading began in 1875, before online trade. Due to its long history of trading commodities, India’s commodity market is now a profitable way to build wealth.
How does commodity trading work?
Suppose you have chosen to invest in a futures contract for copper on a commodities exchange such as NCDEX. You sign into this agreement at a price of ₹800 per quintal of copper. With NCDEX’s 5% margin requirement, securing this deal requires an advance payment of ₹40.
Let us now assume that the next day, the price of copper increases to ₹820 per quintal. You will see a profit of ₹20 in this instance, and your associated bank account will be credited with this sum. In contrast, you will lose ₹20, and your bank account will be credited with that amount if the price drops to ₹780 the next day.
Commodity trading lets you control a large stake with a small investment. This is riskier because commodity prices change quickly. Commodity investors must be cautious.
Forex vs. commodity trading: Know the difference
Commodity and FX trading have both similarities and differences. Both let you speculate on short-term market movements using forex futures. Both allow arbitrage, which lets you profit from currency or commodity price differences between markets.
There are also differences between commodity and FX trading. The commodities market is more regulated than forex. FX trades over the counter through brokers or banks, while commodities trade on exchanges. It means commodities can stop trading if they reach daily limits.
Conclusion
There are several financial instruments available for investment by all types of traders. Commodity and forex trading are different in complexity.
Both are good investments for diversification and international markets. Commodities may be simpler than FX for some traders. Commodities are relatable but not easier to trade. Both require time, money, and education to profit.
FAQs
The correlation between commodities and forex is significant. Countries with large commodity reserves often see their currencies impacted by commodity prices. For instance, the Canadian dollar is correlated with oil prices, while Australia and New Zealand have a close relationship with gold and oil prices.
Commodity money, like gold or silver coins, has intrinsic value and its worth remains even if melted. Paper currency, also known as fiat money, is government-issued and its value is not backed by a physical commodity but by trust in the government.
Forex and commodities have different volatility levels. Commodities are typically more volatile due to factors like weather events and geopolitical issues affecting supply and demand. Forex, while also volatile, sees less erratic price movements.
The most traded commodity in the Forex market is Crude Oil. It’s used as a global economic benchmark and is traded extensively on the Intercontinental Exchange (ICE) and the Chicago Mercantile Exchange (CME).
Yes, commodity trading is considered high-risk. The prices of commodities can fluctuate greatly due to unpredictable factors such as weather, geopolitical issues, and supply-demand imbalances. Therefore, it requires good judgment, caution, and thorough knowledge.