Why they prefer commodities to equities

Gurumurthy K Yoganand D | Updated on January 23, 2018



Suby Mathews

For many of us, buying Nifty futures may be more appealing than buying energy or metal futures. But not everyone agrees. Gurumurthy K and Yoganand D spoke to a few traders to understand why they place their bets on commodities.

Speculation is lower’

Chennai-based software professional Senthil has been trading in commodities for quite some time now. The basics of finance learnt during his higher secondary days came in handy for him when he decided to try his hand at equity trading, 12 years ago. The big losses in equity trading did not turn him away from the market but instead aroused his curiosity to look beyond equities — and that was when he stumbled upon commodities. He has been trading in commodities for the past eight years. He feels the speculative trading here is far less than in equities, given that there is an underlying base price for every commodity.

“I prefer gold and base metals, as they are globally traded, much more liquid and the returns have also been fairly attractive, so far,” says Senthil.

Signing up with discount brokerage Zerodha, which charges a flat brokerage, has also helped. “I had tried a few leading brokerages initially. They charged me 0.02-0.03 per cent as brokerage and it did not seem viable. Thanks to Zerodha, my costs are much lower now,” says Senthil. Moreover, access to a mobile trading platform has made trading much more convenient, he says.

While he is happy about the saving on brokerage, he feels the commodity transaction tax (CTT) is eating into his profits. “I was expecting a cut in CTT this Budget but the Finance Minister was silent about it. That did disappoint me quite a bit,” adds Senthil.

‘More trading time’

Bengaluru-based Suby Mathews quit his high-profile banking job four years ago to pursue trading full time. Mathews too started off with equities and switched to commodities five years ago.

Why commodities? The longer trading window, though it makes for more volatility, provides an opportunity to make more money. “The market is open till late in the night, which gives numerous short-term trading opportunities, albeit with a bit more risk,” he explains.

So, what are his favourites? He prefers to trade energy — crude oil and natural gas — and occasionally trades in gold too.

Does he limit himself to just commodities? He trades in Nifty futures and options and occasionally in currency futures.

Opening an account with a discount broker too helped him reduce costs.

How does he decide on the trade direction? “I closely track the rupee and keep myself abreast of the news developments in the commodities I trade in,” explains Mathews.

In addition to reading, learning from his past mistakes has helped him do better. “Being clear about the timing — when to initiate a trade and when to exit — reducing leverage and pruning losses early have helped me improve my success rate to about 70 per cent,” asserts Mathews.

Coimbatore-based Karthik, who owns a cotton spinning business, uses trading as a hedging tool. “Commodity trading is a great hedging tool and protects against losses due to a sudden price crash. For instance, when I buy 25 bales of physical cotton, I sell 25 bales in the futures market so as to minimise losses in the event of a sharp price fall,” he explains. He reads and researches extensively on the commodity before taking positions.

He has been trading cotton for over eight years now and believes that the market teaches a new lesson everyday. “Be it commodity or equity, losses are inevitable when you trade and nobody is an exception. And you are always a learner when you trade in the market,” he explains.

Apart from cotton, he also trades in Nifty. He feels bullion and other metals are very volatile when compared with agri commodities.

‘I understand them better’

Shankar, who is a silver merchant, uses trading to hedge his position as well as make money from price fluctuations. He has been trading in commodities since November 2003, when the Multi Commodity Exchange (MCX) commenced operations.

As a passionate trader, he used to trade with the surplus money he had, after hedging his open positions. After making losses during the initial six years, he started raking in big money with time and experience.

“I am not able to spend as much time now, as my business demands frequent travel,” he says. But he has not given up trading completely. “I focus on my business during the day and towards evening I do some reading to gather cues and accordingly take one or two trade positions that day. I make sure to close all positions before I hit the pillow,” says Shankar.

Whenever he makes a big loss, he stays away from trading for at least three months. “I use that time to recover the losses by focussing on my business,” adds Shankar.

He does not mix hedging with trading. While he hedges silver he takes trading positions in natural gas, his favourite commodity. Why natural gas? “I find it easy to trade and it has given me good returns,” says Shankar. “But you need to have a strategy of your own and a strict stop-loss while trading,” he cautions.

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Published on May 03, 2015
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