You might have read or heard a lot about Commodity trading. Have you ever tried to get deeper into its meaning. Let’s catch up some interesting details on What is Commodity Trading? What are different types of commodity trading in India and how it works?
What is Commodity?
Commodity, as defined under the English dictionary, means, “a raw material or primary agricultural product that can be bought and sold. It can also refer to material, type of produce, product, article, object, thing, artifact, piece of merchandise, etc.”
All in all, commodities are the things which we use on a daily basis and they are the items which impact our lives on a continuous basis. Simply speaking, Commodity is a group of assets or goods that are significant in our day to day life.
But, did you know we can use these commodities to diversify our investment portfolio as well. That brings us to our topic of the day “Commodity Trading”.
What is Commodity Trading?
Commodity trading is an indispensable part of the Indian financial market.
Commodity trading has been persistent in the economy way before the existence of money and money related trades. We all know this commodity exchange and commodity trading as “Barter system i.e. commodity against commodity”. We have learned in our history lessons that during ancient times our ancestors exchanged commodities to satisfy their needs from time to time.
Thus, commodity trading is very much similar to stock trading. The prime difference is the asset that is traded under this market. Under the commodity trading market, the items traded are supplies like gold, oil, crops, etc., rather than company share, bonds, and debts.
A common tool to hedge price, take speculative positions, and capture the arbitrage opportunity, commodity trading has attracted numerous investors.
Commodity Trading Types
Below are some of the commodities which are currently traded at the Indian as well as the global market. We have categorized them into 4 categories for better understanding.
- Metals: Like gold, Silver, Platinum, and Copper.
- Energy Sources: Like Crude oil, Heating oil, Natural gas, and Gasoline.
- Livestock and Meat: Eggs, Cattle, etc.
- Agricultural Produce: Wheat, Rice, Beans, Corn, etc.
How does Commodity Trading Work?
A commodity exchange is an organized, regulated market platform that facilitates the purchase and sale of items. The price is determined by the play of supply and demand of the product involved.
Every environmental, economical or even natural element can prove to be a catalyst for pricing in such a volatile market. Thus, the traders involved in the commodity trading have to be vigilant for all the changes happening in the market.
Example: In case of Fani (Bhubaneswar cyclone) which impacted the majority of infrastructure and social being, the pricing of agricultural produce and livestock went up tremendously. Hence, the traders who would have invested in such a commodity must have enjoyed a higher profit.
How to Invest in Commodity Market?
There are 6 major commodity trading exchanges in India as listed below:
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
Note: For commodity trading in the above exchanges, both the parties require standard agreements as per the instructions issued under SEBI guidelines. This is essential so that trades can be executed without visual inspection.
Commodity Future Contracts
In the commodity market, the majority of the transactions or agreements are made through future trading. Future trading agreements are nothing but an agreement wherein both the parties agree to buy or sell a specific quantity of a commodity at a set price at a determined future time. You can say, under online commodity trading, the future contracts are traded and not the commodity itself.
Although, commodity market is a high-risk market, but if traded carefully there is a huge scope of profit in them. Therefore, any such commodity trading can help you diversify your portfolio. Further, it can enable you to enjoy the benefit of market movement respectively. Of course, you can’t ignore the huge risks associated with trading. So, be cautious in your trades! Beware of the bigger risks especially if you are an amateur trader.
Select a User-friendly Trading Platform
Choosing the right commodity broker is also a crucial component of your trading expedition. Check for the popular trading platforms, their commodity trading charges, services offered, desktop version and mobile app, and then take the final call.
Disclaimer: There is a high degree of risk involved in commodity trading. The details given on this website are for informational purpose only and cannot be constituted as professional advice in any regard. Please follow due diligence while investing your money.
Which one do you prefer: Stock trading or Commodity trading? Feel free to discuss. And, don’t forget to be alert in the fluctuating markets.