Stock Trading and Commodity Trading

Stock Trading

The process of buying or selling of shares on a stock exchange, where investors are represented by the stock brokers is known as Stock Trading. A company that is floating its stocks is called a public company. It is listed on a stock exchange. Stock trading can be done either physically or virtually (i.e. online).

Stock Trading: Approaches

There are 2 main approaches to stock trading:

• Active approach: It is a more common of approach. While deciding which stocks to buy, the process involves analyzing the company, reviewing the historical share price trends as well as understanding the current forecasts. Active investors are led by the growth and intrinsic value of stocks. This approach is more often applied by the investment managers who manage mutual funds, pension funds as well as the separately managed individual accounts.
• Passive approach: This approach is opted for by those investors who prefer low-risk, high-yielding stocks and invest their money in them mainly for their retirement needs. This approach takes into consideration the efficiency of markets in the longer term. But it is not synonymous with the strategy of 'buy-and-hold.' On the other hand, it implies buying at low prices and selling the stocks when the stocks have reached a higher price level.

Benefits of Stock Trading

• Buying and selling stocks provides better returns as compared to other financial instruments.
• Stock trading can be done either on a full time or part time basis.
• Online stock trading can also be used as a source of income from home for housewives, the elderly as well as the physically challenged.
• Stock trading also offers scope for diversification across various companies, geographies and sectors.

Disadvantages of Stock Trading

• Leverage in stock trading is much lower as compared to that in forex trading or futures trading.
• Traders may have to wait for a long time for the stock prices to rise.

Commodity trading

Commodity trading is a type of financial trading in which primary products, like food, metals & energy, are bought and sold. Trading in commodities is mainly undertaken on contracts that are based on such commodities.

Commonly Traded Commodities

• Agricultural products such as wheat, soybeans, corn, cocoa and oats
• Energy products like ethanol, crude oil, natural gas and uranium
• Precious metals such as gold, silver and platinum
• Industrial metals such as lead, zinc, copper and tin

Commodities trading are also known as futures trading. When one trades futures, he/she does not actually buy or own anything. The contract is bought in order to speculate on the future direction or movement of the price of the commodity.

How is Commodity Trading Done?

Commodities are traded at organized commodity exchanges. Most of the trading involves commodity futures. Here, the underlying asset of the futures is a particular commodity, such as gold, silver, corn or wheat.

When such contracts are bought, the buyer of such future contract gets the right to buy or sell the underlying commodity at a specified price and at a specified future date. The buyer of the contract pays a price to the seller for this right and this is known as the premium.

Broadly speaking, there are 2 different types of markets for commodity trading. Spot markets are markets where immediate trading takes place. This could be personal purchases (buying jewelry with cash) or spot trading on a much larger scale (trading in oil or large quantities of gold). The other market involves future trading where in, a contract is traded, rather than the commodity itself.

Benefits of Commodity Trading

• Commodity trading is much cheaper in comparison to stock trading, since the margins associated with commodity trading are much lower.
• The brokerage in commodity trading is also extremely low.
• Commodity trading proves highly useful for speculators.

Risks of Commodity Trading

Commodity trading is highly risky and may result in huge net losses because of unfavorable market conditions. It is advisable for amateurs to first trade in stock futures before venturing directly into commodity trading.