.png)
Title: A Beginner’s Guide to Commodity Market Basics
What is Commodity Market?
A commodity market is a marketplace where people trade various goods including energy, precious metals, crude oil, spices, and other goods inside a nation.
The Forward Market of Commissions recently permitted trading in futures for about 120 commodities within India.
Investors with a focus on portfolio diversification can make investments in both perishable and non-perishable goods.
It will reduce the risks for all investors and act as a check on the nation's rising inflation rate.
Commodity Market Basics:
A market where commodities are purchased and sold is referred to as a commodity market. Commodities are products or goods that can be exchanged on any global market. There are marketplaces for various raw resources, including wheat, steel, coffee, oil, and other physical items like gold, diamonds, other precious metals, silver, and platinum.
Types of Commodities in the Market
Commodities are separated into two groups:
Hard Commodities and
Soft Commodities.
Hard Commodities:
Natural resources like metals and oil reserves are examples of hard commodities that constitute the foundation of an economy. Other types of hard commodities include copper, iron, steel, aluminum, silver, gold, and silver. These kinds of metals frequently play a significant role in a nation's export trade.
The demand and supply for certain hard commodities may be easily estimated or guessed, making it possible to track the availability and need of these resources on a worldwide basis.
Hard commodities are derived from mined or extracted natural resources.
The two categories of hard commodities are as follows:
Metals – Gold, Silver, Zinc, Copper, Platinum
Energy – Natural gas, Crude oil, gasoline, heating oil, Corn, wheat, sugar, crude oil, and natural gas are examples of the raw materials that nature produces. Raw materials like corn, soybeans, and orange juice are often delivered based on a physical unit like bushels or tons.
Soft Commodities:
Soft commodities are essentially products that are nurtured and grown. Consider livestock, such as cows and other animals, as well as any other agricultural or related items.
Unlike to physical commodities, it can be challenging to predict price changes for these goods because of a variety of local and international factors, For instance, seasonal patterns and weather variations can have a good or negative impact on crops. Furthermore, there is no possible method to correctly predict these events in advance.
Soft commodities are those that are produced through cultivation and maintenance rather than extraction or mining.
Soft commodities are divided into two groups:
Agriculture – Rice, Corn, Wheat, Cotton, Soybean, Coffee, Salt, Sugar
Livestock and meat – Feeder cattle, live cattle, Egg, Processed commodity products such as energy, metals, livestock and soft commodities like coffee and cocoa.
What are the Commodity Exchanges available in India?
22 commodities exchanges have been established in India under the aegis of the Forward Markets Commission.
In India, the following commodity exchanges are the most popular places to trade:
Multi Commodity Exchange of India (MCX)
Indian Commodity Exchange (ICEX)
National Multi Commodity Exchange of India (NMCE)
National Commodity and Derivative Exchange (NCDEX)
Participants of Commodity Market:
There are two major participants in the commodity market:
Speculators
Speculators are traders in the commodity market who constantly monitor commodity prices and forecast future price movements.
If they believe that the price will rise, they buy a commodity contract and immediately sell them when the price rises.
Similar to this, they sell their commodities contracts when they expect a decline in price and then repurchase them later.
Every speculator's main goal is to make a significant profit in any kind of market.
Hedgers
Hedgers are mainly producers and manufacturers who use the commodity futures market to hedge their risks.
Let's clarify with the help of an illustrative example:
A farmer can hedge his position if he expects price swings when crop harvesting is taking place. He will sign the futures contract in order to protect himself from the risk.
If the crop price falls in the market, the farmer can make up for all of the loss by forecasting profits in subsequent markets.
Similar to the last example, if crop prices increase while the crop is being harvested, the farmer may experience a loss in the future market; however, he might make up for it by selling his product for a higher price in the local market.
What is a Commodity Futures Contract?
The agreement that a trader will purchase or sell a specific quantity of their commodity at a predetermined price at a specific time is known as a "commodity futures contract."
A trader is not required to pay the full cost of the commodity when buying a futures contract. Instead, customers can pay a cost margin, which is a set portion of the initial market price. Lower margins allow one to purchase a futures contract for a significant quantity of a precious metal, such as gold, for a small percentage of the initial cost.
Why to Invest in Commodities: Advantages and Disadvantages
Investing in commodities today makes a lot of sense. The top benefits of trading commodities are listed below.
Diversification of portfolio
Returns during inflation phases
Liquidity
However, there are some drawbacks you should be aware of as well. The commodity market is highly risky and might only provide modest gains.
Advantages
Diversification
In comparison to the returns on equities and bonds, the commodity market has performed poorly. As a result, putting a little portion of your money into the commodities market is advantageous to many people.
Even if stock prices are on the decline, it will still enable them to generate a good return on investment. This aids in making up for the negative or decreased profits produced mostly by the capital sector.
Margin Trading
Commodity brokers provide a lower trading margin compared to bond and stock market exchange.
Brokers are allowed to trade using borrowed money, which increases the value of each transaction for both speculators and hedgers.
While commodities traders can benefit from bulk orders by guaranteeing payback later, encouraging speculators to gain bigger profits from such investments.
Real Returns
Specific items are stable in terms of economic and capital market conditions, whereas many commodities are volatile in terms of economic and capital market situations.
Crude oil is a good example of how volatile commodities can be. Due to significant supply fluctuations, challenges with the mining process, or general economic conditions, its price does not remain consistent.
Even though the market is volatile, stockholders invest in such commodities to make a profit and take a long or short position depending on their opinion of the market.
Disadvantages:
Limited Returns
Investments in commodities solely aim to increase capital gains, whereas the stock and bond markets also offer periodic dividends and coupon payments.
To get large returns, however, the commodity market need for true competence. By signing up with a specific commodity broker, anyone can trade on any recognized commodity market.
High Risk
The commodities market is extremely unstable, and any changes in demand or production capacity can have a significant negative impact on pricing.
Because of the extreme volatility, prices are unable to remain constant, which results in huge returns being lost by investors.
Therefore, before choosing to trade in commodities, a person dealing in the commodity market should be well-versed in internal and external issues, such as the internal workings of the company or international trade.
To reduce further risk, one must also maintain supply and demand patterns.
Key Things to Note About Commodity Trading in India:
There are several factors that influence commodity pricing. Similar to stock investment, it is important to get ready before you begin trading in commodities by understanding these elements and learning techniques you can use.
Commodity trading offers larger leverage, but also because market changes are frequent, the risk is also higher.
It's important to regularly keep an eye on the market. If you are new to trading, you might want to enlist the aid of a commodity market expert who can introduce you to the procedure and monitor market changes.
