What is Commodity Trading ? – SMC Global Securities

Commodity Trading can be slightly volatile yet profitable in the period of inflation. With a projected compound annual growth rate (CAGR 2024–2028) of 1.00%, the total value in the commodities market in India is expected to reach USD 1,039.00 billion by 2028. This market offers investors a wide range of hedging, speculating, and portfolio diversification opportunities through its wide range of products covering metals, energy, and agriculture.

What Is A Commodity?

To your query of “what is the meaning of commodity”, here is a simple answer. The items or objects that come under the category of economic goods or services are referred to as commodities. They mostly include the materials that essentially act as the input for manufacturing a final product. Otherwise, they are the items that can be sold in an open market.

What Is the Commodity Market?

A commodity market is a place where one can buy and sell things taken from the earth, from livestock to gold, oil to oranges, and orange juice to wheat. The commodities market is a crucial part of the global economy because it facilitates the trade of raw materials and primary products.

What Is Commodity Trading?

The purchasing and selling of raw materials or primary agricultural goods, such as gold, silver, crude oil, cereals, spices, and more, is referred to as commodity trading. Before officially merging with SEBI to provide an integrated regulatory framework for commercial investment, the Forward Markets Commission supervised market regulation until 2015.

Commodity Exchanges in India

 

There are six major commodities trading exchanges in India:

Indian Commodity Exchange (ICEX)

National Multi Commodity Exchange India (NMCE)

Multi Commodity Exchange of India (MCX)

National Commodity and Derivative Exchange (NCDEX)

National Stock Exchange (NSE)

Bombay Stock Exchange (BSE)

Advantages of Commodity Trading

Now that you know what is a commodity and what is commodity market, let us look at its advantages. Commodities, when sold or bought in the open market or spot market, do contribute to achieving hands-on perks, and below are a few that help in better understanding.

• Potential Returns

  The demand for infrastructure projects is increasing with each passing year, and the industries are in a constant upswing, which will ultimately prompt the increase in prices of commodities. Therefore, it makes an optimistic impact on the stock prices of a group of companies related to the same industry.

• Hedges Against the Inflation

  The basic meaning of inflation is the increase in prices of commodities. The options for hedging are potentially adverse to the rise in prices if commodities have secured the investments of the commodity investors.

• Diversification

  Compared with other bonds and stocks, the commodities typically provide greater returns, especially during volatile markets. Therefore, commodities are considered to be an ideal avenue. Investors who have a decent portfolio of assets will be able to handle the situations with ease. However, there needs to be more guarantees concerning the returns.

Types of commodity market

 

Spot Markets

Also referred to as “cash markets” or “physical markets,” these markets allow traders to trade tangible goods for prompt delivery.

Derivatives Markets

Futures and forwards are the two forms of commodity derivatives available in India. Futures contracts provide the owner of a commodity the right to control it at a specified time for a certain price. They are based on the asset’s present market value. The physical delivery of the item or asset occurs after the contract.

Types of commodities Traded on MCX

Bullion

• Gold

• Silver

Agricultural Commodities

• Cardamom

• Black pepper

• Mentha oil

• Rubber

• Castor seed

• Crude palm oil

• Cotton

• Palmolein

Energy

 

• Crude oil

• Natural gas

Base Metals

• Aluminum

• Lead

• Zinc

• Brass

• Nickel

• Copper

Types of commodities Traded on NCDEX

 

Cereals and Pulses

• Wheat

• Barley

• Moong

• Maize Kharif/south

• Chana (Chickpea)

• Maize rabi

• Paddy (Basmati), etc.

Soft Commodities

 

• Robusta Cherry AB Coffee

• Gur

• Sugar

Fibres

• Kappa

• Guar seed

• Cotton

• Guar gum

Spices

• Turmeric

• Pepper

• Coriander

• Jeera (Cumin)

Oil and Oilseeds

• Cottonseed Oil Cake

• Mustard Seed

• Castor Seed

• Refined Soy Oil

• Soybean

• Crude Palm Oil, and more

Guar Complex

• Guar Seed 10 MT

• Guar Gum Refined Splits

Commodities Trading vs Stock Trading

 

Commodity trading market	Stock trading
It focuses on physical assets such as: crops, metals and livestock.	It majorly focuses on shares of ownership
The supply of commodities may differ based on the demand, time of the year, production levels and more.	The supply of shares is much less likely when the new stock is issued.
It does not pay the dividends to the investors.	It does pay the dividends to the investors.
It potentially has higher volatility.	It has much less volatility.
It is usually complicated for individuals to access.	It is easily accessible for the individual investors.

Conclusion
Trading commodities provides a foundation for risk management, portfolio diversification, and price discovery. Producers use this market to hedge against price volatility, investors to diversify their portfolios, and speculators looking for profit possibilities. The future of commodities trading seems promising, with plenty of room for expansion and wealth as India maintains its status as an important economic player globally.

Author:
All Content is verified by SMC Global Securities.

Reference:
https://www.icexindia.com/
https://www.mcxindia.com/
https://www.ncdex.com/
http://www.nseindia.com/