You should know these basics of commodity trading

basics of commodity trading

Any product of commerce, which is traded on an authorized platform or exchange, is known as a commodity. Among the basic features of such commodity, are transferable values, something which can be bought or sold and which is produced and used as a subject of barter resale. It includes all kind of goods. Indian forward contract (Regulation) Act 1952 defines “goods” every kind of movable property other than actionable claims, money, and securities. It can also be termed as a group of assets/goods that are important in day to day life.such as food, energy or metals. Commodity standing in India started way back in time, but foreign invasion and rule, natural calamities and various government policies and amendments were the major reason for the discouragement of commodity trading. Today, even though there are options like stock market/share market etc., commodity trading has regained its importance.

In 2015, the regulatory body of commodity trading FMC (Forward market commission) was merged with SEB (Security exchange commission) was merged with SEBI (Security exchange board of India). Commodity trading in these exchanges requires standard agreements as per the instructions and uniform guidelines so that the trades can be executed without visual inspection. The commodities are mainly classified into the following types.

  1. Metals – Silver, Gold, Platinum, and copper.
  2. Energy- Crude oil, Natural gas, gasoline, and heating oil.
  3. Agriculture- Corn, Beans, Rice, Wheat, etc.
  4. Livestock and Meal – Eggs, Pork, Cattles, etc.

The best way to invest in commodities is through a futures contract, which is an agreement to buy and sell a specific quantity of a commodity at a set price at a future time. The traders use this type of forwarding contract as a presentation towards the risks associated with the price change in the future. The trading in commodities involves high risk for amateur investors. Like stocks, one can invest in commodities at a current and future date. The farmer can, therefore, buy “Wheat” futures to fix a price at which he would want to sell a certain quantity of wheat. A trader also similarly may buy or sell wheat future for delivery on a future date at a price decided now.

The commodities market is driven by the basic principles of demand and supply. Lower supply drives high demand. When results in high prices are vice versa. Possible disruptions in supply, such as widespread health care scare in cattle high lead to a visible change in the generally stable and predictable demand for livestock. The volatile market typically causes investors to shift towards precious metals like gold and silver, which have been considered as a reliable and dependable deliverable valued. Precious metals can also be used as a hedge against high inflation and periods of currency devaluation. Normally two types of investors participate in the commodity market.

a. Commercial or institutional users of the commodity.

b. Speculation.

There are varieties of commodity investment options both for new and experienced traders. The future contracts of commodity provide the most direct way to participate in price movement, There is also some other type of investments with varying risk and investment profiles which provide exposure to the commodity market. Commodities can also become a risky investment because they can be adversely affected by certain uncertainties which are difficult to predict such as unusual weather pattern, epidemics, and disasters both natural or man-made. The investment in commodities may be a wise thing to do, as some investment adviser recommend to put some of your money in commodities since inflation can hit other investment like stocks and bonds.


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