Different Types of Commodities

Commodities are raw materials used in the production of finished goods and services. Some examples of commodities are gold, crude oil, natural gas, and wheat. There are different commodity market types, each playing an important role in the trading and investment markets. By understanding the different types of commodities investors can easily diversify their portfolios and can take advantage of the changing market trends. In this blog, we will understand what the types of commodities are, how are different types of commodities traded, and a lot more.  

Types of Commodities

The following are the most common forms of commodity market types while each exchange offers a variety of commodities for trading:

Type of Commodities Traded in India

There are different types of commodity markets in India. There are principally two methods that commodities traders can transact. They include the following. 

Futures Contract

A commodities futures contract is an arrangement between the commodity's buyer and seller. The purchasers pay a set price for a specified amount of the commodity. This contract is in effect until a profit is made at the time of expiration when the price of the purchased goods has increased.

Optional Contract

In most cases, top commodities are eligible for options trading contracts, in which the trader has the option but not the legal responsibility to purchase or sell the commodity at a set price. With such a contract, investors may profit from price changes without buying or selling commodities.

Major Commodity Exchanges in India

The major commodity exchanges in India are: 

• Multi Commodity Exchange (MCX) 
• National Commodity and Derivatives Exchange (NCDEX) 
• Indian Commodity Exchange (ICEX) 
• National Multi Commodity Exchange (NMCE)

Participants of the Commodity Market

The following two categories best describe investors who trade commodities types on the commodity markets.

Hedgers

Hedgers include the commodity's producers, manufacturers, etc. Hedgers often enter into a futures contract to reduce their risk exposure. Simply put, hedgers ensure they will receive a set price for their commodities in the future and won't suffer a loss if prices decline at the time of selling.

Speculators

Speculators are active traders who try to forecast the future price of commodities using a variety of variables and continuously track those values. These investors buy the commodity contract and then sell it for a profit if they anticipate an increase in the price of a specific commodity.

How are Different Types of Commodities Traded?

Commodities are traded through different methods depending on their specific type.

1. Spot Trading: Spot trading involves the immediate purchase and sale of a commodity. This trading has physical delivery generally happening within a few days. 
2. Futures Contracts: When traders buy or sell commodities at a predetermined future date and price it is called a futures contract. These are standard contracts, commonly used in commodity exchanges.
3. Options Contracts: Under an options contract an individual gets a right but not the obligation to buy or sell a commodity at a specific price before a specified date. 
4. Exchange-Traded Funds (ETFs): ETFs are like mutual funds, but the only difference is they are listed and traded on stock exchanges. In commodities, ETFs invest in commodities such as gold, silver, and oil.

Conclusion 
Commodity trading may be a method to diversify your assets, protect against inflation, and generate returns. However, traders should have a high-risk tolerance if they want to invest in different commodity market types. Before adding commodities and their derivatives to your portfolio, know and understand the trading strategies in high-risk, high-reward investment instruments. Investing in commodities requires knowledge & experience. Before trading in commodities it's better to research the commodity types and trade with a reliable and advanced broker such as BlinkX. You can download the BlinkX stock trading app on your smartphone and begin trading in just a few steps.