What is Commodity trading:
Commodity markets have seen tremendous growth in India and the world over the past several years. While equity markets are the most talked about in India, the significance of commodity market is often understated. This is in contrast to global trends where currency and commodity markets see higher trading and turnover compared to equities.
Commodities’ trading involves trading in every kind of movable property other than actionable claims, money and securities. These include gold, silver and other metals and select agricultural commodities. Currency trading refers to the exchange of currencies, where the difference in the currency value is used to make profits. It is a huge market, with traded value being higher than equities.
When it comes to trading, the dynamics of every asset class differ and therefore it is imperative to understand the drivers behind price movements. In that sense, both commodities and currency markets are largely driven by macro-economic factors which drive demand and supply.
Where are Commodities available to trade?
Just like the equity stock market, there are commodity exchanges that enable the market participants to easily buy and sell commodities on a dedicated platform. Three primary commodity exchanges are currently operational in India - the Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), and Indian Commodity Exchange (ICEX).
Over the Globe, there are currently around 50 commodity markets that allow trading in around 100 different types of commodities. In a market like India, there are a lot of ways of investing into the commodities but the most direct and easy way to invest is buying a future commodity contract.
Types of Commodities available for trading:
We can classify the different commodities into agricultural and non-agricultural commodities. The non-agricultural commodities can be further sub-divided into three different categories - bullion, energy, and base metals.
Here’s a brief list of the different types of commodities under each category that is regularly traded on the commodity exchanges:
- Bullion – Gold & Silver
- Energy – Crude Oil & Natural Gas
- Agriculture – Black Pepper, Castor Seeds, Palm Oil, Kapas, Chana and many other commodities
- Base Metals – Aluminium, Copper, Lead, Nickel and Zinc
Types of players in the commodity markets:
- Commercial participants
- HNI Speculators
Benefits of trading in Commodity Markets:
- Alternate trading tool
- Good for Hedging
- Exposure to Global price movement
- Low transaction Costs
- Good tool for carry forward positions
How to invest or trade in commodities market:
In line with most of the investment in equity markets and other asset classes, your journey into the commodities market will start once you open a commodity trading account with a brokerage firm like Bigul. Once you have your trading account set up and ready, you can start investing in various commodities of your choice through derivative contracts such as futures and options.
If you purchase commodity derivative contracts and want to hold them till expiry, thenthe contracts are mandatorily settled through physical delivery. Therefore, if you don’t want to take physical delivery of the commodities then make sure that you close all your open positions well ahead of the contract expiry.