scorecardresearchHow are prices determined in Commodities Exchange?

How are prices determined in Commodities Exchange?

Updated: 23 Mar 2022, 02:56 PM IST

A multitude of factors, including global indicators and market demand supply, are considered when calculating the price of various commodities traded on the commodities market.To know more about the factors that affect the pricing of commodities, continue reading.

A commodity market is a place for buying, selling, and trading raw materials or basic goods.

A commodity market is a place for buying, selling, and trading raw materials or basic goods.

Commodities are goods generated from activities such as mining, agriculture, drilling and are transacted on exchanges with the goal of controlling price risk, determining a commodity's actual price, or profiting from speculation.

The commodities market in India is the market that governs commodity trade which has gained popularity among traders in recent years as it allows investors to diversify their portfolios by investing in a variety of perishable and non-perishable commodities. Commodity trading not only reduces risk, but it also aids in the hedging of growing inflation rates in the economy.

Before entering the realm of commodity trading, it is critical for a trader to understand how commodity prices for various commodities traded on different exchanges are established. When determining the price of various commodities sold on the commodities market, a number of criteria are taken into account. 

Understanding how commodity prices are expected to fluctuate as a result of these variables can assist to reduce risks and maximise profits on investment. Let us discuss the factors through which the prices are determined in commodities exchange.

Market Demand and Supply

The market price is significantly influenced by market demand and supply of products sold on a commodities exchange. In the short run, growing demand (for whatever reason) might cause prices to rise since supply cannot be expanded quickly enough to meet the increased need. In general, such an increase in demand may be linked to a gloomy performance forecast for the stock market, prompting investors to seek out safer investment options.

Global Indicators

Global indicators are essential in setting the prices of goods accessible in a country's domestic market. Any unrest in the Middle East, for example, can impact the pricing at which crude oil is exported, as well as the prices at which it is exchanged in the domestic market.

External Factors

Any condition that has an impact on the overall output of specified products sold on an exchange might trigger price fluctuations. A rise in the cost of manufacturing, for example, might raise the prices at which a product is sold on the market, altering the equilibrium rate.

Speculator Trading

Speculators are market players that enter commodities markets with the sole goal of benefiting from price fluctuations without having to own the underlying commodity. Speculators' long-term, coordinated actions in the markets can potentially have an impact on pricing. 

For example, if a significant number of individuals believe that a commodity's future outlook is highly good, they may begin buying it in huge quantities, increasing the price of the underlying commodity. Individuals or institutional investors that engage in high-end algorithmic trading to profit from commodity price changes are known as commodities market speculators.

Market Outlook

Any unanticipated stock market volatility may prompt investors to change their focus to commodity trading, as the odds of major price fluctuations in some commodities, such as precious metals, are minimal. As a result, commodities market investments are safe and provide a buffer against inflation for risk-averse investors.

Commodities trading may be a smart strategy to diversify your portfolio if you understand the consequences and have a clear grasp of what moves the market and how it moves. In some aspects, the movement of commodities prices is comparable to that of stocks; for example, it responds to variations in demand and supply in the same way that the stock market does.

At the same time, commodity prices are considerably more sensitive and responsive to a variety of variables than stock prices, such as geopolitical and macroeconomic issues, and so on.

Various internet platforms for commodities trading are now accessible in India, allowing for convenient and transparent access to the markets. Before investing one's hard-earned money, it is critical to conduct extensive study on all aspects of the market. Commodities trading, although offering potentially huge rewards, also carries a higher risk.


We explain here what is commodity trading.
First Published: 03 Mar 2022, 09:31 PM IST