Correlation Between Commodity & Stock Markets in India
If you have a Demat account and have bought stocks, you must have seen a section called Commodity Trading. Even wondered what is Commodity Market and what link it has to the Stock Market? Read this article to know all the details.
The stock market in India is an interesting place. It has endless potential and gives you the ability to use numerous strategies, including futures and options trading.
At the same time, the commodity market, although lesser-known, is also filled with money-growing opportunities. Contrary to popular belief, investors can even trade futures and options here. But how are they connected, and which one suits you the best? Let's find out. What is a stock market?
A stock market is a place where you can trade stocks of different companies. Stocks are a small percentage of ownership of a company and the price is determined using a demand and supply method. This price keeps changing, sometimes by milliseconds, as more investors try to buy or sell these shares. Although a number of strategies can be applied here, the common consensus is to buy a share and sell them at a higher price to earn profit.What is a commodity market?
It works with the same principles as the stock market but instead of stocks, commodities are sold and bought. The price here is also dependent on the supply and demand and is gauged by market algorithms.
Commodities that are tradable in the market can be divided broadly into two – hard and soft.
Hard commodities are mostly natural resources that are produced through mining or extraction while soft commodities include agricultural and lifestyle products. Commodities like gold, rubber, silver etc. are hard commodities while ones like rice, wheat etc. are considered soft commodities. There are 22 commodity exchanges in India that allow investors to trade them. The most used and popular four commodity markets are:
There are two types of traders in the commodity market – spectators and hedgers. Spectators
These are traders who monitor the prices of different commodities and they try to predict the future prices of the commodity. With this prediction, they use futures and options trading to earn a profit.Hedgers
These are mostly manufacturers or distributors of these commodities. They safeguard themselves from the future ups and downs by trading futures and options. For instance, if a manufacturer predicts that they see a particular commodity's price going down, they can take a hedge position. If the prices go down, this will safeguard them as they can book profits in the futures market. Relation between stock and commodity markets
The biggest relationship between them is the fact that both are directly affected by the same economic conditions. A crisis in the commodity market will affect the stocks of its manufacturers in the stock market and vice-versa. Investing in both gives you diversification which can be used to offset losses from either as well. The key here is to form a portfolio that can give you the desired relation between the markets where one can help you even when the other fails.Conclusion
Commodities markets work similar to the stock markets and give you a chance for greater diversification to safeguard your share market investments and at the same time, earn from the growth of both markets. Research and knowledge are of utmost importance here and for that, a financial advisor can be extremely helpful.
