EN
Commodity trading is the selling and buying of various raw materials and primary goods on an officially recognized exchange. The commodities market is similar to stock trading, in which prices are constantly changing. In today’s economy, there are a wide variety of options for trading different commodities through various exchanges. As guided by the NCDEX list of commodities, the commodity market has grown over time and made commodity trading easy and accessible for the investor.
Key takeaways
-
Commodities are traded in spot and derivatives markets with various needs.
-
India is an active trader in agricultural, energy, and metal commodities on major exchanges, including MCX and NCDEX.
-
Speculators and hedgers are two of the main market participants, particularly for hedgers who sometimes use futures for price risk management.
-
Commodity trading provides pricing transparency, high liquidity, a form of diversification, and protection against inflation.
Major Commodity Exchanges in India
-
Indian Commodity Exchange (ICEX)
Types of Commodity Markets
Commodity markets allow traders to buy and sell raw materials and fundamental commodities while managing price risk. Trading is mostly conducted on:
Spot markets
Spot markets are among the main types of commodity markets, where traders can immediately buy and sell an underlying commodity, such as gold, oil, or an agricultural product, for immediate delivery.
Since the transaction and the delivery occur "on the spot," spot markets can also be called "cash markets" or "physical markets." Prices in spot markets fluctuate continually according to demand and supply factors.
Derivatives markets
Another important type of commodity market is the derivatives market, where traders transact using contracts such as futures and forwards instead of physical commodities.
These contracts are linked to current market prices and can allow buyers and sellers to agree on a price now and complete the transaction at the same price at a later date. When contracts are settled, the commodity can be physically delivered or settled financially.
Type of Commodities Traded in India
The Indian commodities market is divided into three primary categories. These categories assist in simplifying trade and reflect the primary sectors that drive the economy. The key categories are:
1. Agricultural
Agricultural commodities refer to common food items such as coffee, corn, sugar, and soybeans. One of the major segments of types of commodity markets in India, since they are produced and traded on a mass scale.
2. Energy
Energy commodities relate to crude oil, natural gas, and gasoline, which are used for moving people and goods, generating electricity, and manufacturing products such as plastics.
3. Metals
Over the years, metals, including gold, silver, and copper, have also been traded widely. Gold and silver are worn in jewellery, while copper is needed for electrical wiring and industrial purposes.
Types of Commodities Traded in MCX
The list of commodities traded in MCX includes:
-
Bullion: Gold, Silver
-
Agricultural commodities: Black pepper, castor seed, crude palm oil, cardamom, cotton, mentha oil, Palmolein
-
Energy: Natural gas, Crude oil
-
Base Metals: Brass, Aluminium, Lead, Copper, Zinc, Nickel
Types of Commodities Traded in NCDEX
The National Commodities and Derivatives Exchange is an agricultural commodity exchange in India, regulated by SEBI to ensure fair and transparent trading of commodities traded in NCDEX, such as:
-
Cereals and pulses: Barley, Wheat, Chana, Moong, Paddy (basmati), etc.
-
Soft: Gur, Robusta Cherry AB Coffee, etc.
-
Fibres: Kappa, Cotton, Rubber
-
Spices: Jeera, Turmeric, Coriander
-
Oil and Oilseeds: Castor seed, Soybean, Mustard seed, Cottonseed oil cake, Refined soy oil, and more
-
Guar Complex: Guar Seed 10 MT, Guar Gum Refined Splits
-
Metals
The Most Traded Commodities in India
In India, there are two primary types of commodities that traders pursue: hard and soft commodities. Many of which are included in the global list of commodities, actively traded worldwide. Here is some insight into a few of these commodities:
1. Crude oil
Crude oil is one of the most sold commodities in the market, mainly because of the fact that it is utilized in the creation of fuels such as petrol and diesel. The price of crude oil is influenced by the global supply of oil, geopolitical tensions, and oil production leaders such as Saudi Arabia, the US, and Russia.
2. Gold
Gold is actively traded because of its value as a safe and reliable investment. Gold prices move inversely to the US dollar. When the US dollar weakens, demand for gold rises
3. Soybeans
Soybeans are another major agricultural commodity that serves as an ingredient in food products, animal feed, and biodiesel. Soybean prices are typically driven by weather patterns, global demand/speculation, and currency fluctuations.
Participants of the Commodity Market
1. Speculators
Speculators drive the commodity market, along with hedgers. By constantly analyzing the prices of commodities, they are able to forecast future price movements.
For instance, if the prediction is that the prices will move higher, they will buy commodity futures contracts. When the prices do actually seem to move higher, they can sell the aforementioned contracts at a higher price than what they bought them for. Similarly, if the predictions indicate a fall in prices, they sell the contracts and buy them back at an even lower price, thus making profits.
2. Hedgers
Manufacturers and producers typically hedge their risk with the help of the commodity futures market.
For example, if prices fluctuate and fall during harvest, farmers will have to face a loss. To hedge the risk of this happening, farmers can take up a futures contract. So, when the prices fall in the local market, the farmers can compensate for the loss by making profits in the futures market. Inversely, if there is a loss in the futures market, it can be compensated for by making gains in the local market.
What Are the Benefits of Trading in Commodities?
1. Transparency in trading transactions:
Since commodity trading takes place on the exchanges, there is no price manipulation by either buyers or sellers; there is total transparency. If the prices quoted by either party match, an exchange is executed.
Price discovery of commodities happens without manipulation, and this is one of the major plus points of online trading platforms. The lower margins in commodity futures incentivise small traders to utilise this sector for hedging risks and finding higher leverage.
2. Risk Management:
On exchanges, trading happens with total transparency. Therefore, there is little to no danger of counterparty risk. The exchanges enforce proper risk management protocols in order to protect the investors.
Commodity exchanges establish conditions for discovering fair (unmanipulated) pricing, and trades occur only when both parties agree to the same price, encouraging participation from small traders.
3. Elevated Liquidity
High-liquidity commodities, such as gold and crude oil, can be traded in large volumes, allowing traders to enter and exit the market quickly without a significant price change.
4. Portfolio Diversification
Commodities respond differently from stocks and bonds, so adding them to a portfolio can reduce overall portfolio risk and create a more balanced portfolio.
5. Protection Against Inflation
The price of commodities usually increases during inflation, making them a useful tool for protecting against loss of purchasing power and maintaining financial stability.
6. Offers High-leverage Facilities
Commodity derivatives, such as futures and options, are leveraged products. This means that the investor can control a large position in the market with a relatively small upfront investment, as long as they deposit a minimum margin amount with their broker. Typically, the margin requirement is about 5-10% of the contract value.
Conclusion
Commodity prices are influenced by several factors, which should be researched thoroughly in order to employ effective trading strategies. Having a solid understanding of the demand-supply chain is essential, too. Additionally, note that with higher leverage, the risk of commodity trading rises, too. So, if you are a beginner, it is wise to consult research experts and monitor the market constantly.
Armed with vital knowledge of the types of commodity trading, types of commodities, and price movements, your commodity trading journey will be smooth sailing.