Commodity Market - Meaning, Commodity Types, Commodity Exchanges

What is the Commodity Market?

A commodity market is a marketplace where investors may exchange goods like energy, spices, natural gas, crude oil, precious metals, and other commodities. 

Around 120 commodities are now eligible for futures trading in India, according to the Forward Markets Commission. Trading in commodities is an excellent way for investors to diversify their holdings since these assets frequently combat inflation. There are different types of commodity trade in the commodity market which you can do from your trading account.

What is Commodity in the Share Market?

Investors and dealers can purchase and sell commodities on the commodity market.

Two categories of commodities can be distinguished:

• Natural resources such as corn, wheat, sugar, crude oil, and natural gas are examples of raw materials. Raw materials like maize, soybeans, and orange juice are often delivered based on a physical measure like bushels or tonnes.
• Commodity-processed goods, including those involving energy, metals, cattle, and soft goods like coffee and cocoa.

Both the spot and futures markets can be used to trade commodities. 

• In the spot market, the buyer pays the commodity's current spot price right away. 
• In futures markets, purchasers pay for a contract to get the commodity at a certain price in the future. In addition, processed goods may be exchanged in futures markets.

What is the Commodity Market in India?

Commodity prices in India are impacted by a wide range of factors. It is crucial to get ready in advance by comprehending these elements and learning tactics you may use before you start trading in commodities, just like investing in equities.

The risk involved in commodity trading is larger due to the frequent market volatility, despite the fact that you may use more leverage.

It's important to keep an eye on the market often. If you are new to trading, you might want to enlist the aid of an online trading app or commodities market specialist who can introduce you to the procedure and monitor market changes.

What Commodity Exchanges are there in India?

22 commodities exchanges have been established in India under the supervision of the Forward Markets Commission. In India, the following commodities exchanges are the most popular places to trade:

• Indian Multi Commodity Exchange (MCX)
• ICEX (Indian Commodity Exchange)
• National Commodity and Derivative Exchange (NCDEX) and National Multi Commodity Exchange of India (NMCE)

The Variables Affecting Commodity Prices

According to the law of supply and demand, a commodity's price rises with increasing demand, whereas a commodity's price decreases with decreasing demand. The price of a commodity would decrease as its supply increased.

Future commodity demand is influenced by both current and anticipated uses. For instance, individuals would store food in advance to fulfill their demand when it falls if they anticipate a grain scarcity next year due to a natural disaster.

People may opt not to store grain in advance if they know there will be a surplus of grain produced the next year because they can purchase it later at a reduced price.

The spot where commodities are traded is known as the commodity market. Commodities are regarded as homogenous items since they have similar qualities like dependability and functionality.

Types of Trading Techniques in a Commodity Market

Speculators and hedgers are the two main trading techniques in a commodity market.

Speculators

In addition to anticipating future price changes, these dealers regularly assess the cost of goods. For instance, a trader might buy the commodities futures contract if they anticipated an increase in the price of gold. The trader will then sell the contract for a greater price than they purchased it if the price of gold rises thereafter.

Speculators who believe the price of gold will decline will sell their futures contracts. Speculators repurchase the contract at a lower cost than originally paid as the prices fall. 

Hedgers

People that produce or manufacture commodities frequently "hedge their risk" by engaging in trading on a futures market for such commodities. For instance, the farmer will suffer a loss if wheat prices drop during the harvest season. 

A futures contract can be used by the farmer to mitigate this risk. In this situation, the farmer might make money in the futures market to make up for his losses when the price of his crop decreases in his local market. 

In contrast, when wheat prices rise during harvest, a situation like this occurs. The farmer would now experience losses on the futures market. However, he may make up for these losses by selling his products in his neighborhood market for more money.

What Makes Futures Markets Different From Commodity Markets?

Since trading occurs on a regulated futures exchange, commodity markets are also known as futures markets. Farmers who wanted to protect themselves against volatile crop prices negotiated the first futures contracts. In the futures contract, they may sell their harvests for a set price to lock in a guaranteed income.

There are several other applications for futures contracts today: guaranteeing equitable access to the market for buyers and sellers; protecting against price volatility; and stabilizing prices by betting on future changes in commodity prices. Giving investors access to commodities without requiring them to take actual possession of the goods and many more.

They are based on one or two factors, such as the stock price, as opposed to other financial products like stocks or derivatives.

The market where raw resources are exchanged is known as the commodity market. Natural resources that are not transformed into final goods are known as commodities. The current price for immediate delivery in the cash market is known as the commodity's spot price.

Conclusion

Trading in commodities is a wonderful approach to combat inflation in India since prices for commodities rise in places where inflation rises. However, the significant level of leverage in commodities futures contracts makes them risky.

Regardless of the trading method used, keeping a close eye on the commodities market is necessary.