What is Commodity Trading ?? Know the Basics of Commodity Trading In India !!
What is a commodity?
A commodity is a group of assets/goods that are important in everyday life, such as food,energy or metals. A commodity is alternate and exchangeable by nature. It can be categorized as every kind of movable good that can be bought and sold, except for actionable claims and money.
Commodity trading in India started way back in time, even before it did in many other countries. But, foreign invasions and ruling, natural calamities, and countless government policies and their amendments were major reasons for the diminishing of commodity trading. Today,even though there are various other forms of stock market/share market trades, commodity trading has regained its importance.
Where to invest in commodities?
There are six major commodity trading exchanges in India as listed below.
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
In 2015, the regulatory body of the commodities trading – Forward Market Commission (FMC) merged with Securities and Exchange Board of India (SEBI). Commodity trading in these exchanges requires standard agreements as per the instructions so that trades can be executed without visual inspection. In general, commodities are classified into four types:
– Metals – Silver, Gold, Platinum, and Copper
– Energy – Crude oil, Natural gas, Gasoline, and Heating oil
– Agriculture – Corn, Beans, Rice, Wheat, etc.,
– Livestock and Meat – Eggs, Pork, Cattle, etc.,
In India, commodity trading is carried out in energy, metals and agricultural products only. Commodity trading is generally carried out in the futures market. Futures market is one where I agree to purchase a product after a definite period of time at a pre-determined price.
How to invest in commodities?
The best way to invest in commodities is through a futures contract, which is an agreement to buy or sell a specific quantity of a commodity at a set price at a future time. Futures are available on every category of commodity. Traders use these contracts as prevention towards the risks associated with the price swing of a futures’ implicit trade good or raw material. Trading in commodities involves high risk for the amateur investors.
The Bottom Line
Investing in commodities can quickly degenerate into gambling or speculation when a trader makes uninformed decisions. However, by using commodity futures or hedging, investors and business planners can secure insurance against volatile prices. Population growth, combined with limited agricultural supply, can provide opportunities to ride agricultural price increases. Demands for industrial metals can also lead to opportunities to make money by betting on future price increases. When markets are unusually volatile or bearish, commodities can also increase in price and become a (temporary) place to park cash.