Is Commodity Trading Profitable?

‘Is commodity trading profitable?’ is a question that comes up in the mind of every person who wants to dip his toes in the trade. Today we are going to uncover the truth if commodity trading is profitable or not.

Commodity Trading Profitable

Commodity trading is the dematerialized trading of real-world commodities like gold, silver, cotton, rice, oil etc. It is done through online commodity trading exchanges and it aims to make the traders earn a profit through price fluctuations in the commodities.

Also Read: Fluctuation in Gold Price and Equity vs Commodity

For example, suppose you buy a unit of any commodity ‘X’ for ₹100 today. Tomorrow, the price of the commodity becomes ₹110 per unit and you sell it. You have earned a profit of ₹10. This makes commodity trading profitable. But is it that simple always? Let’s answer this!

Obviously, the price of the commodities doesn’t always go in the direction you wish it to. Often, commodities can fall in price at any particular time.

This can mean a loss for you if your stock market prediction turns out wrong. This can make one doubt the commodity trading profitable factor. You might think that you can suffer a loss regardless of your effort.

The truth, however, is not so.

These prices depend on several external factors.

For example, take the case of one of the most common commodity types – wheat. If a heavy rainfall destroys the wheat crops in an area, the supply of wheat would reduce while the demand will stay the same.

This would, invariably, increase the price of wheat.

Now imagine the government passes out a policy that significantly lowers any taxes associated with transporting farming goods. The price of wheat would reduce by a certain factor.

Therefore, ‘is commodity trading profitable or it brings a big loss?’ depends on various factors that are at play, at that given point in time and how well you can contemplate those factors.

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Commodity Trading Vs Stock Market Trading

Don’t worry, we are not getting off-topic but treat this just as a different way to make you understand the concept.

The fact that commodity trading has a ‘risk factor’ associated with it might make you reconsider ‘is commodity trading profitable’. But if you think about it, there no such trade possible that does not involve a risk factor.

Now the main point of consideration is the extent of risk factor associated with commodity trading vs the risk factor associated with general day to day trading.

Suppose you are in the business of egg distributors. You buy eggs from poultry farmers and sell them to wholesalers and make a profit with the difference in selling price and cost price.

One day, the news comes up that bird flu is spreading in your region. The demand for eggs falls down significantly. The lot of eggs you have purchased hardly has any customers and they become rotten.

Darn!

Eventually, you would face a loss of the entire batch of eggs that you have purchased. Further, since it is your primary business, you would face an economic breakdown as well since your business has slowed down considerably.

The example extends to many other areas as well. With a slump in the egg market, industries that use egg-based products will be affected as well. This induces a chain of big losses due to a single phenomenon.

To understand it better, let us take another example. Suppose you are in the business of cold freezing agricultural crops to sell them in the seasons where they aren’t available.

You have purchased a whole lot of fruits and vegetables and frozen them in your storage.

One day, the electricity fails and your entire batch of stored commodities gets ruined. This would be a sudden and huge loss.

While these are examples related to a specific sector, there are risks associated with each and every method of general trading. Now we will see why commodity trading is so much better than general trading in so many regards.

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6 Factors that Make Commodity Trading Profitable

Commodity trading is profitable and a great option to consider if you want to make good money.

Here is why:

1. Commodity Trading is a good side business:

Commodity trading can go hand in hand with any other business that you do. It doesn’t require a special office, a special place or anything else. All you need is a device with an internet connection and you are good to go.

Commodity trading timings are flexible from 10:00 in the morning to 11:30 pm (05:00 pm if you are trading in agricultural commodities). Therefore, commodity trading can be a good side venture that can even fund your main venture.

2. Commodity Trading is based on real-world commodities:

Unlike stock trading or bonds, commodity trading is based on real-world commodities like wheat, pulses, gold, silver, gasoline, crude oil etc (or some of the other top commodities available out there to invest).

An average person uses these commodities and has some idea about their price and price fluctuations.

This is way better than trading methods like stock trading where an average person doesn’t really understand the companies that offer their stocks, their business models, their market, etc.

3. Everything happens through the internet:

In early times, to trade in commodities people had to take their commodities to the market physically. However, times have changed drastically now. Commodities trading is done through commodity trading exchanges that operate online.

There is no physical handling of commodities required. If you are trading in wheat, you don’t have to build wheat storage. You do not have to arrange for wheat transportation.

You do not have to wait for buyers. Everything happens through online portals.

All you need to do is make some clicks of the mouse and taps of the keyboard. This further reduces the risk of loses by eliminating things going awry at your end.

4. Flexible Investment:

Unlike other businesses which require a large amount of money just for operations to start, commodity trading can be started from minimal investment.

It is up to you how much money you want to put in the business. This is a huge plus point of commodity trading as compared to other businesses.

If you are scared of commodity trading risks, you have the option of reducing your investment to reduce your losses until you have a better idea about the market.

5. Prompt payments:

If you know about how business goes in the real world, you might be aware of late payments, missing consignments, missing payments etc. that most businessmen face. However, in commodity trading, payments are quick and prompt.

You can choose to withdraw money to your bank at any time. This is a major factor that makes commodity trading profitable.

6. Diversification:

If any particular commodity that you trade in faces a slump in the market, you can always diversify to another commodity.

This makes sure that your business always keeps going and keeps commodity trading profitable all through the year, even when your primary commodity isn’t going well.

However, in the case of other businesses, if the business fails, it means the end of all the investment that you have put in it. Further, you wouldn’t have any funds to sustain your lifestyle in that case.

With these reasons, you can certainly make out whether we have been able to answer the burning question of ‘Is Commodity Trading Profitable?’. Feel free to pen down your thoughts and experiences in the comments section below.

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More on Share Market Education:

In case you wish to learn more about Commodity trading or stock market investments in general, here are a few reference links for you: