What Determines The Price of Commodities in The Market?

In the financial market, commodities are a separate asset class. The commodity market is a marketplace for buying and selling primary goods. Commodities like gold, silver, copper, corn, soybean, natural gas, and others are traded globally, including on Indian commodity exchanges. 

India has six commodity exchanges, but the most famous is the Multi Commodity Exchange.

The Indian commodity market is where traders can trade in sophisticated financial instruments like derivatives, swaps, futures and options. So, commodity prices trading on the exchanges are not set by a single entity. Several economic factors influence a commodity’s price.

What are commodities?

In the finance market’s parlance, commodities are primary products that can be bought and sold in bulk in the marketplace. When traded, commodities can be a significant asset class for traders. Commodities are broadly split into two categories – hard and soft commodities. These commodities are commercially traded globally in the commodity marketplace.

Types of commodities

Commodities are traded in three categories in the Indian exchanges 

• Metals – It includes precious and commercial metals like gold, silver, copper, zinc, and nickel  
• Energy – Crude oil and natural gas
• Agricultural and livestock – Black pepper, cardamom, castor seeds, cotton, crude palm oil, rubber etc.

Factors affecting commodity price

Commodity price, like stock price, fluctuates continuously due to several external and internal factors. Let’s look at the factors influencing the price of the commodity market.

Macroeconomics and geopolitical factors

Commodity prices are typically affected by shifts in global and political factors. For example, changes in the economics and political scenario of OPEC countries affect crude oil prices in the worldwide market.

Demand and supply

Commodity price change directly results from demand and supply factors. When demand exceeds supply in the market, commodity prices rise. Conversely, prices fall when supply is significantly lower than demand in the economy.

Speculations

Speculators are commodity market participants who enter the market with the sole purpose of earning profit from price fluctuations. Their actions influence the price of the commodity market.

What are commodity prices in economies?

The commodity price results from buyers and sellers interactions in the market. There are two different ways of quoting commodity prices – the first is the market futures price, which is the price reported in market news. The second is the spot price, which is the cash price of the goods. It is the price that you must pay if you buy the item if you buy it today.

How do you start commodity trading?

Once you gain enough knowledge of the market, start trading. 

Open Demat account

You need a Demat account to trade commodities. You can choose any registered broker regulated by SEBI, like Angel One, to open a Demat account.

Deposit initial amount

After opening the account you will need to make an initial deposit to take a position in the commodity market. The deposit amount is usually 5-10 percent of the contract value and depends on the commodity you are trading.

Different ways individuals can trade in the commodity market. 

Direct investment

Direct buying is the most common way of investing in commodities.

Buying stocks

You can take exposure to commodities by buying stocks of companies from the sector. For example, you can purchase stocks of an energy company.

Commodity ETFs and mutual funds

Commodity ETFs are an alternative method to take exposure to the commodity market. If you want exposure to gold or silver, you can invest in gold or silver ETFs.

Wrapping up  

Commodity trading is an excellent way to diversify your portfolio. If you get the basics right and estimate your risk appetite accurately, you can take exposure to commodities as an asset class. Commodities trading, while promising great returns, also increases risk. It is essential to conduct an extensive study and understand all aspects of the goods market before investing hard-earned money. Begin your journey in commodity trading and open a demat account with Angel One.   

Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.