A market for commodities is a place where raw materials or basic goods are bought and sold i.e. traded. These markets enable producers and consumers of commodity products to trade in a controlled liquid market. In India, futures trade of nearly 120 commodities is regulated by the Forward Markets Commission.
Commodity trading is ideal for investors who wish to diversify their portfolios, because these assets typically contribute to inflation. Some market players also buy commodity products to safeguard future consumption or output. Let us try to understand it in detail.
What is a commodity?
Any substance that has its own inherent worth and can be traded for money or other products and services is a commodity. Fuel, farm goods and metals etc. sold either in bulk or on the spot market, or on a commodity trading site are part of the commodities under investment and commercial activities.
Types of commodities
The commodities are divided into four main categories.
Agricultural: Agricultural commodities comprise coffee and maize, which is a significant food source to animals and people. It also includes soybeans, whose oil is the most important food product in the world and wheat which is used to make crackers, breads, cakes and cookies .
Energy: The commodities of energy include raw oil used in transportation and manufacturing of plastics, natural gas for generation of electricity and petrol which is used to power light-duty vehicles and cars.
Metallic: Metals such as gold, which is used in the production of gems, and silver, which is used for jewellery and several other industrial purposes fall in this category.
Livestock : Livestock covers all cultivated animals such as cows, buffalos, sheeps etc. irrespective of their age, location or breeding purpose.
What is commodity trading?
Commodity trading involves the purchase and sale of numerous goods and their products. Any raw resource or basic agricultural product is a commodity, including many others, which may be purchased or sold, whether it is wheat, gold, or crude oil. If you indulge in trading commodities, these products can help diversify the portfolio of your assets.
Commodity trading is generally carried out in India through derivative agreements such as commodity futures and options. A derivative contract such as futures and options is derived from a commodity asset. You can take the delivery of physical goods or settle in cash upon maturity, in accordance with the contract conditions.
Where to invest in commodities?
In India, there are six key commodity trading exchanges. In these trading arrangements, standard agreements are required according to the instructions, so that businesses may be carried out without visual examination.
- Multi Commodity Exchange
- National Multi Commodity Exchange
- National Commodity and Derivatives Exchange
- Ace Derivatives Exchange
- Indian Commodity Exchange
- The Universal Commodity Exchange
India has a long tradition of trade in goods and associated derivatives and is one of the leading manufacturers in a vast range of products. Here, commodity trade is considered to be a wonderful strategy to tackle inflation since commodity costs rise in regions with increasing inflation.
However, future markets remain mainly underdeveloped for commodities. The cause for this is government intervention in the agricultural sector. Furthermore, future contracts for commodities are extremely leveraged and risky due to which regular market surveillance is considered vital, regardless of which trade technique you choose.