Advantages of Commodity Trading in Nigeria

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Commodity trading is where many commodities and their derivatives products are purchased and sold. A commodity is any raw material or primary agricultural product that can be bought or sold, whether wheat, gold, or crude oil, among many others. When you engage in commodity trading companies in Nigeria, such commodities can diversify your asset portfolio.

 

Agricultural commodities are stapled products and often provide a source of food for global business. These include grains, dairy products, and livestock. There are many benefits of trading in commodities. Let us understand those in detail.

 

Protection Against Inflation

As the demand for goods and services increases, the price of the goods and services rises as the cost of the raw materials, i.e., commodities, increases. In such an inflationary situation, interest rates increase, which raises the cost of borrowing and consequently reduces the company's net income. A drop in the income of the company also affects the profits shared with the shareholders.

 

Hence, during inflation, the costs of the stocks fall. In contrast, the prices of commodities required to manufacture finished goods considerably rise due to the growing demand, resulting in the increasing prices of the final goods. Hence, investors leave to commodity futures to protect their capital from the consequences of inflation and maintain their value.

 

Hedge Against Risky Geopolitical Events

Geopolitical events such as riots, conflicts, and wars interrupt the supply chain, leading to a lack of resources. It becomes hard to procure and transport raw materials to the factories, where they are turned into finished goods. In such a case, the supply of the raw materials gets affected, which causes a mismatch of demand and supply, causing the prices of the commodities to increase exponentially. During such events, there is doubt in the market, causing the stock prices to fall drastically. Therefore, investing in Nigeria commodities can help stem losses in an investment portfolio.

 

High Leverage Facility

Commodity derivatives like options and futures provide an exceptionally high level of leverage. You can control a great position by paying only 5% to 10% of the contract value as an upfront margin. Any trifling move in the prices of the commodities in Nigeria can result in exponential profits. Hence, you found the possibility of humongous returns by using leverage in commodity trading. The minimum edge for commodity futures may change but is much lower than stocks. E.g., you need to place only 23% of the entire value of trade as the initial margin for wheat futures.

 

Diversification

Agricultural commodity trading in Nigeria enables retail and corporate investors to diversify their portfolios. Commodities have a negative or low association with stocks. Commodities are usually raw materials needed to make the finished goods. Rising commodity costs raise the cost of production, reducing profits, leaving very small for shareholders, and decreasing the earnings per share. This ultimately leads to a drop in the prices of the stocks.

 

Also, due to inflation, the current value of future cash flows paid by stocks fails because future cash will buy lesser goods and services than they would purchase today. 

E.g., If oil prices rise, the cost of having a car also increases, which results in decreasing car sales. Hence, the prices of auto stocks also fall. Therefore, due to this negative correlation where an increase in the cost of commodities drives the stock prices down, the losses caught in stocks can be adjusted against the gains achieved by commodity derivatives. Thus, adding commodities gives diversification to your portfolio. Commodities respond to key factors like weather, geopolitical instability, strikes which affect the supply and demand of commodities. 

 

Transparency

Compared to the complaint system in the past, trades in commodities are now conducted on an automated trading platform accessible to all market associates. The electronic trading platform helps in good price discovery allowed by broad-scale participation without the interference of the buyer and seller. During the whole trade, the buyer and seller remain anonymous, thus allowing a transparent price discovery without any extent for manipulation.