Commodity vs Forex Trading - Understand the Difference Online | Espresso

Commodity Trading vs Forex Trading

Whether you are a new investor or have been in the market for a few years now, certain questions about some securities other than stocks, bonds, etc., remain unanswered. Well, not anymore! If you want to know what other options you have aside from the stock market, there is commodity trading and forex trading. However, since they are not the same as your stock market, let’s look into each of them and understand them better.

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What is Commodity Trading?

Commodity trading, in the simplest sense, is the purchase and sale of commodities in a dedicated market called the commodity market. It is the exchange of various assets, mainly futures contracts, that are based on the price of an underlying commodity. The underlying assets are physical commodities such as -

  • Gold, silver, zinc, copper, and more.
  • Coal, steel, bauxite, iron ore, etc.
  • Chemicals, earth metals, and others
  • Natural gas, crude oil, thermal coal, etc.
  • Oil services, mining services, etc.
  • Grains, oilseeds, pulses, spices, and more.

There are about 50 commodity markets globally that deal in 100 commodities. Therefore, as an investor or trader, if you are seeking to diversify your portfolio, an investment in the commodity market may help you.

In India, the commodity market is active for more than 12 hours, opening at 9:00 AM on weekdays and closing at 11:30 PM. The market is closed on public holidays as decided by the exchange.

What is Currency or Forex Trading?

Forex market trading involves trading in different currency pairs. As this market is the largest financial market globally, entities such as investment first, banks, hedge funds, forex brokers, etc., are the participants of forex market trading. The prices of the currencies are determined by factors like demand, supply, inflation, political and economic events around the world, etc. In India, you can only trade in the following currency pairs –

  • GBP/USD
  • USD/JPY
  • EUR/USD
  • USD/INR
  • JPY/INR
  • EUR/INR
  • GBP/INR

If you are planning to take up forex trading, you will not only need to stay up-to-date with the forex market but also understand why you want to trade certain currency pairs.
Also Read: Complete Guide on USD INR Trading

The forex market is open for forex investment 24 hours a day and five days a week. However, this timing is split into various sessions across the global time zone to accommodate trading in different locations.

Differences between Commodity Trading and Forex Trading

As evident from the descriptions, there are clear differences between commodity trading and forex trading. However, these are some more differences that you should know about –

Points of Distinction

Commodity Trading

Forex Trading

Regulated by

Securities and Exchange Board of India

Securities and Exchange Board of India and Reserve Bank of India

Traded on

The Multi Commodity Exchange of India, the National Commodity & Derivatives Exchange Limited and the National Multi-Commodity Exchange that has been merged with the Indian Commodity Exchange Limited.

The Bombay Stock Exchange, the National Stock Exchange and the Metropolitan Stock Exchange of India Ltd.

Exchange limits

Since commodities are traded on an exchange, there are limits on commodity exchanges.

Currency is traded over the counter, and so, there are no exchange limits.

Leverage

The leverage in commodity trading is lesser as compared to forex trading.

There is a higher amount of leverage in the forex market, and is easier to fulfil.

Influenced by

Commodity markets are influenced by weather, geopolitics, demand and supply, trade regulations, etc.

Currency markets are influenced by geopolitical events and macroeconomics.

For a very long time, though commodity trading and forex trading did not receive the importance they deserved, the situation is changing now, thanks to the global trends that support these markets. In fact, both markets provide lucrative exposure to investors and traders in their own ways.
Also Read: Equity vs Commodity Trading

Frequently Asked Questions

Yes, the forex market is regulated jointly by the SEBI and the RBI; however, the commodity market is even stringently regulated.

There is no denying that commodities carry quite a bit of risk as they are a volatile asset class. However, those who are familiar with the commodity market know how to deal with the risks and learn to at least mitigate them since eliminating these risks is not possible.

You can trade commodities and forex on a futures exchange; however, it is not possible to trade commodities in the currency or forex market.

In the market, leverage refers to the capacity of utilising borrowed funds to increase your account balance, profit margins and the size of your trades through the investment. While forex trading enables flexible leverage, the same cannot be said for commodity trading.

As an investor or trader, you can choose which commodities you want to invest in based on the commodities of your choice and your risk tolerance. It is safe to say that you can choose natural gas, energy, gold and wheat to start with.