Pros And Cons Of Commodity Trading.docx

1. Pros And Cons Of Commodity Trading? If you are planning to invest in commodity trading, you should essentially know the different aspects of it, as well as the advantages and disadvantages of investing in it. This article covers some of the important pros and cons of commodity trading that you should have a look at. Commodity trading involves buying and selling various commodities and their derivatives, which are raw materials or primary agricultural products. Some examples include grains, beef, natural gas, oil, and gold. Engaging in commodity trading, like metal trading, can diversify your asset portfolio. But just like everything else, this too has its pros and cons. Pros of commodity trading ● Protection against inflation Growing demand has led to a rise in the prices of commodities required in the manufacturing industry, ultimately leading to a rise in prices of the final goods. Thus, your capital is protected from the effects of inflation and maintains its value. ● Guards against risky geopolitical events Geopolitical events can disrupt the supply chain, leading to a scarcity of resources. Hence, the supply of raw materials gets affected resulting in a mismatch of demand and supply. In such cases, the prices of commodities can rise exponentially. So if you plan to buy gold commodities online, it can help to stem the losses in an investment portfolio. ● Diversification Commodities can have a very low to negative correlation with stocks. Rising commodity prices mean an increased cost of production. This reduces the profits, and thus the shareholders are left with very little, also reducing the earnings per share. But commodities perform better when the rate of inflation is rising. ● Transparency Since commodity trading is now conducted on an electronic trading platform that is accessible to all market participants, it helps in fair price discovery, eliminating the risk of any form of manipulation. The buyer and the seller remain anonymous during the entire trade, thus enabling transparency. Therefore, you can invest in gold in UAE without worrying about such issues. Cons of commodity trading ● Leverage Leverage helps you to control a big position with very little upfront capital. But remember that even a minor change in the price of the contract can have a huge impact on your gains and losses. You also have the risk of low margin requirements which can even wipe out your entire investment. ● Volatility Needless to say, the prices of commodities are highly volatile, depending upon the demand and supply factors. Before you buy gold commodities online, remember that since the commodities are prerequisites of daily lives, the price changes may not affect their demand. The inelastic demand and supply of commodities can generate large fluctuation in the prices with even a slight shift in the market. ● Not ideal for diversification

2. Cash provides better returns than commodities, with much less volatility as well as with a somewhat similar correlation to stock. Thus, commodities trading like metal trading may not be ideal for the diversification of your portfolio. ● Asset concentration The commodity funds are concentrated in 1 or 2 industries and hence are not diversified. Thus, a minute change in the price can have a significant impact on the share price of the commodity ETF. Final words Commodity trading, with all its advantages and disadvantages, is still considered the best way to diversify your investment portfolio. So, you can invest in gold in UAE since it is a lucrative investment path that can help you create abundant wealth. ICM is a leading global multi-regulated broker with its roots in London. It offers access to a diverse range of trading products including currencies, commodities, stocks, fund managers, and much more.