Commodity Market Trading For Beginners & How to Trade in India - Strategy & Meaning
Commodity Market Meaning
A commodity market is a place where goods are bought and sold. Commodities are goods that can be exchanged on any market around the globe. Wheat, steel, oil, coffee, and other raw resources, including gold, diamonds, other precious metals, silver, platinum, and other minerals, are all traded on commodity markets.
The commodity markets often fall into two categories:
Agricultural products and raw materials are traded on physical commodities markets. Contracts to deliver the underlying commodities at a specific price on a specific date in the future are traded on futures markets.
Merchandise that can be purchased and sold can be found in a commodity market. These products are raw ingredients or core agricultural products. Commodities are not the same as goods produced in factories using manufacturing processes or by service industries.
What Does Commodity Mean In The Stock Market?
On the commodity market, traders and investors buy and sell commodities.
Commodities can be divided into two categories:
Raw commodities: Natural resources such as corn, wheat, sugar, crude oil, and natural gas are all produced by nature. Raw goods, such as corn, soybeans, and orange juice, are typically given in physical measures, such as bushels or tons.
Processed commodity: Commodity products have been altered in some ways, such as energy, metals, animals, and "soft" commodities like coffee and chocolate.
Commodities can be traded on either the spot market or the futures market. The buyer immediately pays the item's current spot price on the spot market. People purchase contracts in futures markets that promise them goods at a specific price in the future. You can also trade processed items on futures markets.
Categories Of Commodities In Commodity Markets
Depending on the material exchanged, commodity markets can be broadly divided into soft commodities and hard commodities. Wheat, sugarcane, and coffee are soft commodities, whereas metals like copper, gold, or oil are hard commodities.
The crude oil commodity market is frequently regarded as the most significant of all commodity markets. Before being sold to customers, most oil is refined into gasoline, diesel fuel, or other petroleum products.
Certain historians contest the origin of the commodities markets because it wasn't until after the 19th century that they took off.
The commodity is bought, and sold market is known as a commodities market. The term "commodities market" can also refer to the commodity exchange, bazaar, board, or bazaar. Food grains, metals, crude oil, and other commodities are exchanged on the commodity market.
You must be familiar with trading on commodity exchanges to engage in the Indian commodity market today. A commodity exchange is a controlled marketplace where commodities are traded. Traders can engage in futures contracts rather than taking actual delivery of commodities. A futures contract is a commitment to purchase or sell a specific amount of a commodity within a predetermined price range and expiration date.
The national commodities exchanges in India are listed below:
- Multi Commodity Exchange of India Ltd (MCX)
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICEX)
- National Stock Exchange (NSE)
- Bombay Stock Exchange (BSE)
Commodity Market Timings in India
Trading on the Commodity Derivatives segment takes place on all days of the week (except Saturdays, Sundays, and holidays declared by the Exchange in advance). The market timings of the commodity derivatives segment are Normal Market Open: 09:00 hrs. Normal Market Close: 23:30 hrs
How Are Commodity Market Trading Prices Determined?
Unlike manufactured goods and services, commodities are by-products of fundamental economic activity like mining, agriculture, and drilling. Similar to how stocks are traded, commodities are also exchanged. The objectives of share trading are to ascertain the real prices of commodities, make profit speculations, or evaluate cost risk. The idea of this kind of trading has been around for a while, with Amsterdam's stock exchange setting the standard for commodities trading.
- Commodity Market in India
India's two most significant commodity exchanges are the Multi Commodity Exchange and the National Commodity and Derivative Exchange. Various exchanges host commodity trade.
- What are the names of the participants?
If you want to comprehend how India sets the prices of commodities, you should be aware of the participants. The actions of these parties affect market prices. There are generally two kinds:
Hedgers - Hedgers are companies or sectors requiring a sizable number of raw resources. They have to buy these for a reasonably constant price. For instance, the building sector needs steel. Industries can commit to future purchases as a price hedge, ensuring that their steel needs will be met at the current price. As a result, a pattern of predictable pricing develops, which manufacturers and sectors appreciate since it makes it easier to plan effectively for the future.
Speculators - In India, speculators are people who do not require a product. They are merely regular investors hoping to make money off of price movements. They typically trade commodities, which involves buying inexpensive commodities and then selling them when their prices rise.
Price calculation online Similar to stock internet trading, commodity trading has taken India by storm. Similar to how stock prices change, so do commodity prices. The primary elements affecting commodity prices are as follows:
- Demand and Supply Factors - Based on trader behavior, the concepts of demand and supply impact commodity pricing. The price of a specific commodity increase when buyers exceed that commodity's sellers, and vice versa.
- External Conditions - External factors like the weather may impact demand and supply. For instance, the cost of heating could go up when it's chilly outside. As a result, natural gas is in high demand, raising the product's price.
- Eco-political factors - A nation's politics and economy impact price variation in the commodities market. Crude oil prices, for instance, could be impacted by political or economic unrest in one or more OPEC (Organization of Petroleum Exporting Countries) nations, as these nations generate the majority of this commodity.
- Speculation - When trading commodities, speculators make investments based on whether they believe a given commodity will be profitable or not. Some commodity prices change as a result of this.
How to Do commodity Trading on Upstox?
Customers can trade commodities online with Upstox, an MCX member. Customers can start trading on the MCX for a flat Rs. 20 per order fee by opening a Upstox commodity trading account online. Customers in Upstox may trade in commodities such as oil, copper, zinc, gold, and silver using a commodity account. While AMC's trading account is free, the broker charges Rs. 150 to register a commodity trading account. The broker offers Upstox Pro as a single platform for trading various commodities. The platform of the Upstox Pro web and mobile apps allows users to trade in commodities.
Commodity Trading Benefits
- Diversification: Returns on commodities are not highly correlated with returns on other investments. Commodities can be used to diversify your investment portfolio as a separate asset class.
- Inflation safeguard: Commodities are seen as a strong hedge against inflation since their prices typically increase during times of high inflation. By doing this, the purchasing power parity is preserved.
- Hedge against event risk: Protection from event risk Commodity prices may increase if supply disruptions occur due to a natural disaster, an economic downturn, or a conflict. However, by carefully capitalizing on price fluctuations, commodity trading may help you prevent loss. For instance, a consumer could take a long hedge by purchasing a futures contract based on the current price of commodities to lock in the input price of raw material. A producer that wants to sell their product for a high price may decide to use a short hedge by selling a futures contract.
FAQs On Commodity Market
What do you understand by commodity market trading?
Commodities are purchased and sold on the commodities market, much like how a firm's shares are traded on the stock market. Producers, wholesale dealers, and manufacturers frequently use this financial market to establish prices for a range of products and commodities.
What are some of the risks associated with investing in the commodity market?
Some of the risks associated with investing in the commodity market are as follows:-
- Volatility - Commodity trading can occasionally be quite volatile. Therefore you should always regularly check your position, especially in times of pandemic or conflict.
- Speculative Nature - Demand and supply, a fundamental economic premise, determine a commodity's price. But predicting that is extremely tough. For instance, nobody anticipated that neon gas prices would soar following the Russia-Ukraine conflict since two Ukrainian firms that provide a sizable amount of the world's supply suspended their operations.
Give some examples of commodities that are traded in the commodity market
Types of commodities that are traded in the commodity market include Bullion, Gold, Silver, agriculture commodities like cotton, cardamom, castor seed, black pepper, crude palm oil, rubber, palmolein, energy like natural gas, crude oil, base metals like brass, aluminium, copper, zinc, lead, cereals and pulses like wheat, moong, chana, paddy, etc.
How does the market for commodities operate?
Similar to other markets, the commodities market operates. You can purchase, sell, or exchange different commodities in this physical or virtual environment at present or in the future.
Futures contracts can be used in commodity trade as well. An agreement between a buyer and a seller, known as a futures contract, states that the buyer will pay the agreed-upon amount at the time of the transaction in exchange for the seller delivering the commodity at a certain future date.
Which are the commodity market exchanges today in India
There are various national commodities exchanges in India like the National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India Ltd (MCX), National Stock Exchange (NSE), Indian Commodity Exchange (ICEX), and Bombay Stock Exchange (BSE)