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Commodity vs Currency: Understanding the Differences and Risks

By: PressReach

You would be familiar with online trading in the share market but do you know about commodity and currency trading? In terms of global trading volume, commodity and currency markets surpass their equity counterparts. 

In today’s blog, currency, and commodity trading online is our topic. We will go through the differences in fundamentals and the risks these asset classes represent. As a market participant, you should understand the nuances of each asset class and trade it based on the risk and return it has.

Understand Commodity Vs. Currency

Commodity as an asset is widely influenced by various global factors including demand and supply, geopolitics, international policies, and more. Additionally, you must keep tabs on commodity producers, weather, government regulations, and other factors to trade efficiently in commodities. 

Commodities can be segregated into four main categories – metals, bullion, energy, and agricultural produce. Each commodity has its dynamics and factors affecting its price. For instance, the price of crude oil is heavily influenced by the actions of OPEC (Organization of Petroleum Exporting Countries) members. As a participant in the commodity market, you must keep an eye on these developments.

Currency, on the other hand, is traded in pairs, unlike commodities or stocks which are traded in a single asset class. This means if you trade any currency pair, you buy one currency and sell another currency. Quotes in the currency market can be INR/USD, GBP/JPY, EUR/USD, and others. You can trade currencies via currency derivatives in India. 

The forex market a.k.a. the currency market is ranked first globally in terms of being the largest financial market. However, the trading volume is derived only from a handful of currencies like USD, JPY, EUR, GBP, and CHF. Based on your research and preferences, you can trade currency online via derivatives such as options and futures on Dhan.

Commodity Vs. Currency: Risk Factors

Commodity markets are highly influenced by demand and supply dynamics, trade terms, weather forecasts, and other exogenous events. Most of the risks in the commodity markets are systematic risks and are unique to each commodity.

For example, geopolitical issues in a major well-known oil producer country shoot up the prices of oil. You can take the example of Russia’s invasion of Ukraine, which led to sanctions being imposed on Russia and its oil supply. Another example is the slowdown in the economy of China, due to which commodities like Steel and Aluminium came under pressure. 

Currency markets are also influenced by the demand and supply trend, inflation, interest rates, trade balances, debt level, and many more. For currency, macroeconomic factors are the main drivers. They also impact an economy and as a result its currency. 

Thus, before you decide to trade currency online, you must be aware of the government policy, global positioning, and market sentiments for that currency pair. 

As a market participant, you need to scrutinize the risks that are involved and adjust your bids accordingly, whether you are undertaking currency or commodity trading online.

Conclusion

We hope that this article helps you understand commodity and currency as an asset class. If you are doing online trading in the share market, these asset classes can help you diversify your portfolio. However, as a market participant, you need to determine the pertinent asset class you can trade based on the objective, risk tolerance, and return expectations.

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