Both stock market trading and commodity trading are popular means of making profits in India. Although they are different in various aspects, there lies a significant correlation between them.
If you are new in the world of investing or planning to kick off your investment journey with stocks and commodity trading, you should be aware of the various aspects related to these.
Keep reading to learn how the stock market and commodity trading are interlinked with each other.
Understanding About Commodity and Stock Market Trading
Before moving to commodity trading, it is crucial to know what a commodity refers to. Commodities are products that can be exchanged with other products of similar types. The price of each commodity remains fixed. Factors such as supply and demand are crucial to determining the prices of these products. Some examples of commodities include gold, grains, natural gas, oil and others.
Stocks are, on the other hand, are securities that represent partial ownership of a company or business entity. Stock and shares of a company are traded on a regular basis on stock exchanges. Similarly, commodity stocks are traded at commodity exchanges.
How Are They Correlated?
To understand the correlation between commodity trading and stock trading, you can analyse how they benefit you. Commodity stocks involve actual products, while stocks represent ownership of shares of a corporation or business entity.
Both are assets, and you can buy or sell them on the respective exchanges. Although they are influenced by a specific set of distinctly different factors, they are significantly interrelated with each other.
It has been evident that whenever stock value rises, commodity values witness a slump and vice versa. Let’s take the example of gold. Gold is one of the most popular and frequently traded commodities worldwide. Why? This is because most investors see gold as a robust and highly stable investment that helps to hedge against market volatility that can impact stock prices.
When a market downturn affects stock markets, investors rush towards gold to minimise the loss and protect their investments. Naturally, both the value and demand for gold shoot up. Conversely, when the market moves upward, and the stocks tend to perform better, the demand for commodities tend to drop.
Moreover, the government has been planning to fuse the SEBI and FMC (Forward Markets Commission). FMC is the regulator of commodities and commodity trading in the country. This merger between FMC and SEBI will lead to the creation of a single platform for trading. This platform will facilitate the trading of both commodities and stocks, and securities.
This would come with major opportunities for investors.
Significance of Correlation Between Stocks and Commodities
Both stocks and commodities play a vital role in the investment and financial portfolios of a large portion of Indian investors. You can collect and store stocks and commodities to use them as a hedge for protecting your investments in the event of a market downturn. You can use both commodities and stocks as safety instruments during an emergency.
Clear knowledge about the correlation and difference between commodity and stock markets will help you to make informed investment decisions down the line.
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Frequently Asked Questions
1. What are the two exchanges for commodity trading?
You can carry out commodity trading through the following exchanges:
- MCX (Multi Commodity Exchange of India Ltd., Mumbai
- National Commodity and Derivative Exchange, Mumbai and others
2. How is the commodity market different from the stock market in terms of volatility?
The commodities market is typically more volatile as compared to stock markets. This is because commodities are sensitive to supply-demand dynamics and geopolitical events.
3. Are there any similarities between stocks and commodities in terms of returns?
Investors look towards stocks and commodity classes to receive aggressive returns on their investments.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.