Trading commodities has been an age-old practice that has evolved over the years. Today, there is a wide range of commodities, and modern-day trading occurs on exchanges such as the Chicago Mercantile Exchange or the London Metal exchange. One requires an account with a trading platform to access the commodity markets.
Before getting started with commodity trading, in this article Here, we learn about commodity trading.
What are commodities?
Commodities are standardized resources or raw materials with the intrinsic value used to manufacture refined goods. It can be categorized as every kind of movable good that can be bought and sold, except for actionable claims and money. The quality of commodities may be variable, but they must be substantially uniform on some criteria across different producers.
As opposed to goods, commodities are standardized; two units of a commodity in equal measure will be identical regardless of their production or origin, thus also making them interchangeable. Examples of commodities would be iron, crude oil, natural gas, steel, cotton, silver, grains, pulses, etc.
There are two types of commodities in the market, i.e., hard commodities and soft commodities. Hard commodities are often used as inputs to make other goods and provide services, while Soft commodities are used primarily for initial consumption. Inputs such as metals and minerals are classified as hard commodities, while agricultural products like rice and wheat are softer commodities.
Commodities are traded on the spot market or exchanges. The commodities must meet minimum standards set by the exchanges to be able to trade. Traders can buy these commodities on the spot market or through derivatives such as options or futures. Commodity trading offers portfolio diversification beyond traditional securities. And since commodity price moves in the opposite direction of stocks, investors indulge in commodity trading during periods of market volatility.
What is The Commodity Market?
Similar to any other market, the commodities market is either a physical or a virtual space where interested parties can trade commodities at present or future dates. The economic principles of supply and demand dictate the price.
Types of commodities
About fifty major commodity markets worldwide are trading in more than 100 commodities. Traders can trade in four major categories of commodities:
Metal: Many metals like iron, copper, aluminum, and nickel, used in construction and manufacturing, are available for trading, along with precious metals like gold, silver, and platinum.
Energy goods: Energy sources like oil and natural gas play a major role in powering the globe and are used for transportation in our homes, factories, etc. Other examples include uranium, ethanol, coal, and electricity.
Agricultural commodities: A wide variety of agricultural and livestock products trade in the commodity market. For example, sugar, cocoa, cotton, spices, grains, oilseeds, pulses, eggs, feeder cattle, and more.
Environmental goods: This group includes renewable energy, carbon emission, and white certificates.
The most-traded commodities are gold, silver, crude oil, Brent oil, natural gas, soybean, cotton, wheat, corn, and coffee.
Types of commodities traded in India (MCX)
- Agricultural commodities: Black pepper, castor seed, crude palm oil, cardamom, cotton, mentha oil, rubber, Palm olein
- Energy: Natural gas, Crude oil
- Base Metals: Brass, Aluminium, Lead, Copper, Zinc, Nickel
- Bullion: Gold, SilverTypes of commodities traded in India (NCDEX)
- Cereals and pulses: Maize Kharif/south, Maize rabi, Barley, Wheat, Chana, Moong, Paddy (basmati)
- Soft: Sugar
- Fibers: Kappa’s, Cotton, Guar seed, Guar gum
- Spices: Pepper, Jeera, Turmeric, Coriander
- Oil and Oil seeds: Castor seed, Soybean, Mustard seed, Cottonseed oil cake, Refined soy oil, Crude palm oil
What is commodity trading?
Like stock trading, wherein one buys and sells shares of certain companies, you can buy and sell commodity products in commodity trading. Commodities are traded on certain exchanges, and traders aim to profit from the changes in the commodity market by buying and selling these commodities. Commodity trading for beginners can be made easier with Contracts For Difference (CFDs), one of the commodities’ most straightforward trading options. CFDs are financial instruments that allow you to capitalize on price movements without the ownership responsibility of the underlying security.
Commodity Trading in India
The commodities exchange is the legal entity that decides, regulates, and enforces the rules and procedures for trading commodities, such as standardized commodity contracts and other related investment products. It is an organized market where various commodities and derivatives are traded.
In India, one can trade commodities by going on any of the 20+ exchanges which facilitate this trade under the regulatory eye of the Securities and Exchange Board of India. Till 2015, the market was regulated by the Forward Markets Commission, which was finally merged with SEBI to create a unified regulatory environment for commercial investing.
To start trading in commodities, you will need a Demat account, a Trading account, and a Bank account. The Demat account will function as a keeper of all your trades and holdings, but you will still need to go through a good broker to place orders on the exchanges.
India has six major commodity trading exchanges, namely,
- National Multi Commodity Exchange India (NMCE)
- National Commodity and Derivative Exchange (NCDEX)
- Multi Commodity Exchange of India (MCX)
- Indian Commodity Exchange (ICEX)
- National Stock Exchange (NSE)
- Bombay Stock Exchange (BSE)
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