Parallel to the equity market, forex and commodity trading are becoming increasingly popular in India. The two share both similarities and differences. Traders of commodities buy and sell under the bullion, metal, energy and agriculture categories. Meanwhile, the foreign exchange market deals in various currencies.
What is the Commodities Market?
In the commodities market, investors trade in gold, silver, copper, lead, zinc, crude oil, natural gas, cotton and sugar among others. Around 50 commodity markets exist around the world today, dealing in 100 commodities. As a result, investors in the commodities market are at a benefit of diversifying their portfolio.
You can invest in the commodities market by means of futures contracts. As per this type of contract, the buyer is under an obligation to purchase a commodity at a certain price and the seller is similarly obliged to supply the same on a future date. Multi-Commodity Exchange of India Limited (MCX), National Multi-Commodity and the Derivatives Exchange of India Limited (NCDEX) are some of the commodities exchanges in India.
What is the Forex Market?
The forex market deals in various currencies, and there is no physical exchange for such trading. It remains open for five days a week. Companies, banks, investment firms, hedge funds and forex brokers participate in the currency market, which is the world's largest financal market. The exchange rate for each currency is affected by its demand and supply, which in turn is impacted by inflation, interest rates, political scenarios and economic strength.
Investors in the forex market have more choice and can trade through the spot, forwards and futures markets. Unlike futures markets, delivery of commodities or assets are made immediately in spot markets. In forex spot markets, currencies are exchanged at the price prevailing at the time of the transaction.
Commodity Trading Vs Forex Trading
Both currency and commodities markets have their unique benefits. The commodities market allows for alternative investment opportunities, thereby diversifying your portfolio. They have seasonal patterns that can be predicted and tracked. The transaction cost is lower, and commodities also make effective carry trades.
Forex markets, on the other hand, are hihgly liquid since the security being exchanged is currency itself. Investments in forex can also be hedged for protection from risks.
Both afford a great exposure to global markets and have long market hours thereby making trading flexible. Currency and commodities both offer high leverage trading, with forex having an edge over commodities in this regard.
Factors Affecting Investors’ Choice
Several factors affect and individual’s choice between investing in forex vs commodities. Here are a few:
1. It may be a matter of personal choice. Commodities being a physical market, the ramifications of which can be seen in everyday life, some traders can relate to it and thus choose to invest.
2. Regulations for forex markets are not as tight, and can be avoided more easily. As a contrast, commodities markets are under more rigid regulations.
3. Since commodities are traded on an exchange, they have a daily range limit. No trades can be placed once these limits are exceeded. On the other hand, it is much easier to exit your trade after quick losses in the forex market when compared to commodity markets.
4. Several currencies such as the Australian, Canadian and New Zealand dollars are based on various commodities -- Spot Gold, crude oil and dairy respectively. Investors may trade in these and avail the benefits of both forex and commodities trading to some extent.
The underlying difference between forex vs commodity trading is that the former deals in currencies and the latter in commodities such as oil, gold and coffee. While buying and selling of currencies depends on factors such as trade flows, tourism and geopolitical situations, commodities trade is driven by demand and supply.
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