The fundamental difference between forex and commodity trading concerns the underlying security. Commodities trade involves goods like cocoa and coffee and products that can be mined, such as oil and gold. On the contrary, forex or foreign exchange is a global market that trades in currencies like rupees, euros, dollars, and yen. Some similarities exist between commodities and forex trading regarding their approaches and analysis.

However, several factors make deciding which is best for you easier. While stocks are market-driven by fundamental factors, the commodities and currency markets are regulated by macroeconomic factors that initiate demand and supply, trade, and geopolitics.

Commodities and currencies are global markets, giving investors more information about other countries’ goings-on.

Commodity Trade

There are about 50 commonly known commodity markets in the world today.These markets enable the trading of about 100 investment commodities. The categories in which traded commodities fall are four broad categories: energy, agricultural produce, metals, and bullion. It includes natural gas, crude oil, gasoline, and heating oil in energy. The economic condition and oil production through the world’s largest wells affect the product prices. Investors should not be unaware of the changes in OPEC(Organization of the Petroleum Exporting Countries), alternatives to energy and economic traps. Sugar, cotton, coffee, cocoa, soya beans, black pepper, castor seeds, and cardamom are a few crop products that a trader can invest in. Bullion includes metals like gold, silver, and platinum. Other metals, like copper, lead, zinc, and nickel, are also traded in the commodities bazaar.

There are various avenues of investing in a commodity; the most basic is committing to a future contract. These are contracts issued whereby the receiver of such would be compelled or obligated to sell or buy off a specific good on a scheduled delivery date to an agreed and predetermined price for it. Then, there are these three prominent personalities involved in this commodity trade.

Commercials or Hedgers

These include companies involved with the processing or producing of a product or its merchandising. For example, crop farmers can serve as commercials for a crop’s grain commodity. The commodity trade is mostly about commercials.

Large Speculators

These are also groups of investors who pool together their money, reducing risk but increasing gain. Similarly to mutual funds, these large speculators have money managers who make the investment decisions.

Small Speculators

Small speculators are individual commodity traders who trade via a commodity broker or through their accounts. Both primary and small speculators can heavily affect the commodities market.

Advantages of Commodities Trading

• Trading in commodities has benefits, including the fact that commodities are excellent choices for diversification within a portfolio.
• Investors can access global markets.
• Most commodities are traded more actively during specific times of the year.
• Profits from commodities fall within a sizable range, allowing trading flexibility.
• Commodities traders typically have lower transaction costs than securities traders.
• Commodities make an efficient investment for speculative purposes. 

Currency Trading

Forex markets mainly comprise commercial companies, banks, investment management firms, retail forex brokers, and hedge funds.

Forex is now the largest financial market in the world. Currency rates on forex are a factor in the demand and supply of the country’s currency by investors on the market. This demand and supply depend upon inflation, interest rates, economic uncertainty, trade balance, political scenarios, and more within a particular country. Generally, the degree of confidence in a country’s economy determines the price of its currency on forex. Foreign exchange or forex is the trading of international currencies in pairs. In India, stock exchanges such as the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), United Stock Exchange (USE) and MCX-SX offer the marketplace for the sale and purchase of currencies. Forex is the world’s largest market, though only a few currency pairs make up the majority of trading volume. Commercial banks, central banks, corporates, forex brokers, investment management firms, hedge funds, and retail investors are participating in the trading of currencies.

Trading in this market does not require opening a Demat account. Opening a trading account with the broker will be more than enough, as cash or equity used by the stock market is not required for currency trading. The forex market is open between 9:00 a.m. and 5:00 p.m., and one can trade only in the futures and options segments.

How Currency Trading Pairs Work?

In other markets, one security is a stock or commodity; however, trading in the currency market happens in pairs. With every deal, you have to sell one and buy the other, and every one of these is expressed in terms of a quotation as (currency 1/currency 2). Currency 1 is the base currency, and currency 2 is the quote currency.

The allowed currency trading in India is: (USD/INR), (EUR/INR), (JPY/INR), (GBP/INR), (EUR/USD), (GBP/USD) and (USD/JPY). Significant pairs, nearly always involving the US dollar, are (USD/EUR), (USD/CAD) and (USD/GBP). Those that do not include the US dollar are known as minor pairs. Exotic pairs are where one currency is significant, and the other is minor.

Pips

Pip stands for percentage in point, or price interest point, the lowest change in a currency pair’s pricing. One-hundredth of one percent is the fourth decimal place in the currency quotation. Pip helps determine the profit and loss from a currency trade.

Future Derivatives

Forex trade in India is carried out through currency derivatives like futures contracts, forex spots and forwards. Futures contracts give the date, quantity and price at which currencies will be traded in the future. This method is used in the forex market instead of physically exchanging currencies for trade.

Advantages of Currency Trading

• Currency trading is also very liquid, meaning that traders can withdraw their profit whenever needed, which is helpful in emergencies.
• Traders can utilize international markets by trading currencies, similar to commodities trading.
• The prime times when currency traders can be traded are also longer. The currency markets are open 24 hours a day, 5 days a week, meaning traders can transact almost any time.
• The leverage in currencies is higher than in commodities, allowing the trader to open more prominent positions.
• Moving into different types of assets for diversification may also include investing in other forms, such as currency trading.
• Hedging against political or event risk can protect your investments in the case of political events or any other events that may affect the market.

Commodity vs Forex Trading

In a way, trading on forex or commodity markets shares similarities and differs in other aspects. Just like trading in commodities, you can also speculate on the short-term movement of markets with currency futures on forex. Like commodity trade, you can even enjoy the opportunity of arbitrage in the forex trade. In this context, you can avail yourself of returns by benefiting from the diverse exchange rates in various markets for the same currency or commodity.

However, in terms of regulation in forex vs. commodities markets, commodities are heavily regulated, while forex trading is more loosely regulated. Finally, forex is traded over the counter through brokers or banks, while commodities trade on an exchange. Hence, commodities have daily limits that, if exceeded, prohibit further trading. However, for investors seeking diversification and exposure to global markets, both make for effective investments.

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