Indian economy is a commodity-based economy where two-thirds of its population depends upon the agricultural commodities. It is still an underdeveloped commodity market considering the above fact. India was one of the most active markets until the early 1970 s. However, the development of this market was a little bit slower due to a number of restrictions earlier. Since most of these limitations have been removed no, there is a substantial potential for growth of this market.
The most specific feature of commodity market is that it offers imminence potential to become a separate class of market investors, arbitrageurs, and speculators. This market may seem to be very deep and unfathomable for retail investors. It is important to make a balance between risk and the advantages in the commodity market. Another important feature of this market is that the pricing has been less volatile as compared to that of stocks and bonds. This would enable in providing an efficient portfolio diversification opportunity.
It is an important part of the financial market of any country. It is a market where a wide range of products viz precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee, etc. are traded. This would help the investors to mitigate their commodity risks and take a speculative position in commodities and exploit arbitrage opportunity in the market.
Commodity future trading
Using derivatives as a tool for managing risk was first originated in the commodity market. They were found very useful in hedging tool in the financial market. Though the basic concept of the future contract remains the same while the underlying risk is related to commodity or to a financial asset. However certain features are very specific to the commodity market. In case of physical settlements of contracts, the financial assets are not bulky and as such do not need physical storage. Due to the bulky nature of commodity assets, the physical settlement needs warehousing. Therefore in the case of commodity trading, the quality of asset under a contract can very largely. This can become an important issue to be resolved.
In Indian, the commodity market exists for only one kind of manufactured goods i.e. jute goods. The commodity market provides a definite place where the traders can do their transaction under some standard rules and regulations.
The commodity markets for different commodities make adjustments between demand and supply of the respective commodity, which is in the interest of industry and trade. This market facilitates regular information about the prices of a commodity prevailing in the market; there is a separate committee to settle disputes among members by arbitration.
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 and man-made.
The investment in commodities may be a wise thing to do, as some investment advisory recommend to put some of your money in commodities since inflation can cause some loss other investment like stocks and bonds.