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Different Ways to Trade in Commodities

There are several ways to trade in commodities. These include:

Direct Investment

It is the most common way to invest in commodities. For example, you can directly purchase items like gold and silver in the form of coins and jewellery. However, direct investment in these items entails a high transaction cost. Also, there are issues related to storage and purity.

Purchase Stocks

This is another way to trade in commodities. For instance, if you wish to trade in energy, you can buy stocks of an energy company. The stock price will closely follow the price of energy. If you invest in commodities through direct stocks, there are chances of making profits even if the commodity is not doing well.

For instance, if you have purchased shares of an established energy company, even if energy prices are going down, you can still make profits given the company’s sound fundamentals.

Commodity ETFs and Mutual Funds

There are many ETFs and mutual funds based on commodities. For example, if you want exposure in gold or silver, you can invest in gold or silver ETFs. There are no purity or storage-related issues with ETFs as the units are held electronically in your demat account.

Bottom Line

Commodity trading can be beneficial if you get the basics right and accurately estimate your risk appetite. Have a proper plan and execute it to derive maximum value from commodity trading.

Commodity trading has two key benefits: diversification and hedge against inflation and geopolitical risks.

Diversification: Commodities expose your portfolio to a different asset class and provide it the balance it warrants. Diversification is a fundamental principle of investing and helps mitigate risks. A well-diversified portfolio is crucial to ride market volatility.

Hedge Against Inflation and Geopolitical Risks: High inflation, more often than not, pushes up commodity prices. Investing in commodities helps you maintain your power parity with rising prices. Hence, they act as a good hedge against inflation. They also act as a hedge against geopolitical events that can disrupt the supply chain leading to their scarcity.

courtesy to : shareindia


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