Trading equity or commodity futures-a comparative analysis

In my view,  IF one’s views on a stock are driven primarily by the price of a particular commodity, then it may be better to invest directly in that commodity itself, due to more leverage, than trading via that future. This will be a more direct view and lower risk of trade slippage, as evident in below table where commodity futures wins over equity futures.

Parameter	Equity Futures	Commodity Futures	Overall winner-which results in less trade volatility
Trade impact Cost/ Market Depth	Depends on free float	Usually negligible (high for Agri)	Commodities
Market Manipulation risk  on underlying asset	Possible(and has happened earlier on expiry)	Possible, but not easy to prove and usually counterbalancing forces prevail	Commodities
Stock specific issues causing value traps/spikes	Possible(eg Cairn loan to HZL-cash trap)	NOT APPLICABLE	Commodities
Sector valuations convergence	Possible-multiples may change due to ‘re-rating’	NOT APPLICABLE	Commodities
Insider Trading	Possible	Front running of OPEC meetings possible	Neither
Geopolitics factors volatility	Domestic level	International Level(but domestic drives agri also)	Neither
Market Trading Times	9:15am to 3:30pm; Monday to Friday	10:00 am to 11:30 pm(Agriculture till 5pm)-Monday to Friday 10am-2pm Saturday-only Agri	Commodities-Can be done AFTER full time job
Cash Settled	Compulsary	Physical Settlement risk possible	Equities
Circuit Filter	+-20%	+-9%(or 4%-6%)	Commodities

Should you trade commodity markets or commodity stocks-an example of CAIRN India

Whenever I trade stocks in ‘commodity’ sectors such as sugar, metals, energy(or stocks dependent heavily on them), I wonder whether it is better to directly trade the underlying commodity or not.

Below example compares taking exposure on the related commodity future(CRUDE OIL) instead of taking on the related stock futures-CAIRN INDIA. Margins/Prices are taken from Zerodha margin calculator and are illustrative.

Parameter	Equity	Equity Futures	Commodity Future
Underlying security	CAIRN INDIA LTD	CAIRN INDIA LIMITED-JUNE16 FUT	CRUDE OIL
CMP	141.65	142.8	3347/barrel
MIN LOT SIZE	1 share	3000 shares	100 barrel
MIN TRADE SIZE	14.65	428400	334700
DELIVERY MARGIN (% of trade size)	100%	13%	6%
INTRA DAY MARGIN MULTIPLE(times of delivery margin)	10x	2.5x	2x

From the above, it seems evident that IF one’s views on a stock are driven primarily by the price of a particular commodity, then it may be better to invest directly in that commodity itself, due to more leverage, than trading via that future. This will be a more direct view and lower risk of trade slippage, as evident in below table where commodity futures wins over equity futures. 

How individual investors are disadvantaged in the stock markets and what you can do to overcome it

Parameter	Disadvantage	What you can do/Turning it into an advantage
Access to institutional equity research reports	Quite limited, and chances of front running-circulation to preferred clients only	Read reports for the business insight, do the valuation/price targets yourself. Also, use sites like ICICI/MOFL and RJ.in for getting relevant reports
Algorithmic trading	Complex to set up and  practical challenges to run it	Buy algo strategies from places like return2wealth.com or else participate on sharp price moves to benefit from mistakes in the ‘prop algo’
Order Filling	Collocation so chances of front running order flow	Give enough steep margin so that losses are minimized eg-No market orders, falling knife
Risk Capital	Limited risk capital	Trade with capital you can LOSE once you have COMPOUNDED the returns you like
Seriousness	Chance of treating lightly/less attention as not a full time job, else distraction from full time job	Prepare shopping list(trading plan) and review at noon if any changes to it. Also treat it like a business with monthly P&L tracking
Team	Single man army/limited bandwidth or emotional support	No boss/second guess of decisions/autonomy
Market Access	Limited access to overseas markets or strategies like covered calls/Stock Lending	Advantage as can cover stocks which are screened out due to float etc
Charts/Software/Terminals	Not available to a day trader or individual investor	Avoid distraction-go for swing trades as far as possible-as Apps will not permit
Type of orders placed	Limitation from using basket etc which are not available on phone/app	Try and place stop loss/cover after entering the trade, if active monitoring not possible

Parameter	Usual institutional disadvantage	Your advantage
Scope of coverage	Usually 10-20 stocks if not more	Can decide what you wish to cover as per circle of competence-However do look at the macro picture also to avoid getting blindsided
Patient Capital Access	Usually impatient capital for mutual funds w/o lockin period-However private equity/PIPE funds/Prop Funds tend to be more patient	You can be patient capital not letting prices dominate your reason for existence
Returns benchmark	Limited risk appetite due to fear of underperformance vs relative returns	Absolute returns
Investment size+Diversification	Need a liquid and big investment to move the needle	Can do with small and concentrated portfolios as well