Commodities markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities is one of the best options.

Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Commodities are easy to understand and are based on the fundamentals of demand and supply. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, prices in commodities futures have been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.

Why Commodities?"
Is the inevitable question that pops in one's mind today, more so considering that the BSE Sensitive Index is scaling new highs by the day. Well, despite offering relatively lower returns, commodity derivatives provide unique money-making opportunities to a wider section of market participants, starting from planters to exporters, importers et al. And to the agrarian Indian population commodities are obviously not new, nor are the advantages of trading in them unknown.

No balance sheet, P&L statement, EBITDA and reading between the lines. Commodity trading is about the simple economics of supply and demand.

Supports are known, only resistance matters! Minimum support price acts as a statutory support for many commodities.

No Dollar-Rupee premiums/discounts. No hedging on the NYMEX. Indian commodity derivatives hedge both forex and commodity specific risks at a single cost.

No breaking of heads over market direction. Seasonality patterns quiet often provide clue to both short- and long-term players.

No scam, no price rigging. Commodity trading comes with nil insider trading and company specific risk.

What's more, why invite risk by investing in a metal company when you can trade in the metal itself? After all, while the stock price of the company is dependent on several factors including the company's own fundamentals, the price of the metal is driven by the simple economics of demand and supply. The more the demand for the metal, the higher its price and vice versa. Also compared to equities it is much cheaper to trade in commodities, where margin requirements are lower.