A commodity market or commodities exchange is a platform where investors trade commodities. These commodities include crude oil, energy, natural gas, precious metals, spices, etc. As per the Forward Markets Commission, commodity exchanges in India are allowed to conduct futures commodity trading for 120 commodities. Commodity trading is ideal for investors who wish to diversify their portfolio and also get a hedge against inflation in the economy.
Commodities Exchanges In India
Under the Forward Markets Commission, 22 commodity exchanges have been set up in the country. Some of the commodity exchanges for trading in India are listed below:
Indian Commodity Exchange (ICEX)
Multi Commodity Exchange of India (MCX)
National Commodity and Derivative Exchange (NCDEX)
National Multi Commodity Exchange of India (NMCE)
The Commodity Derivatives Market Regulation Department (CDMRD) of the Securities and Exchange Board of India (SEBI) regulates the operations of these commodity exchanges.
Commodity Futures Contract
A commodity futures contract is a type of contract in the commodity market where the trader assures to buy/sell a fixed amount of their commodity at a pre-decided price on a given date. A trader is not required to pay the complete price for the commodity when he/she purchases a futures contract. Instead, he/she will only need to pay a pre-determined percentage of the original market price of the commodity.
Working Of The Commodity Market
Let’s understand this with an example. Assume that you pay a certain margin price and purchase a gold futures contract on the Multi Commodity Exchange of India at the rate of ₹70,000 per 100 grams. Now, on the following day, if the cost of gold goes up to ₹71,000 per 100 grams, you will earn ₹1,000, which will be credited to your bank account. However, if the price drops to ₹70,000 again the next day, ₹500 will then be debited from your account.
Participants In Commodities Markets
There are two main types of participants in the commodities markets who drive commodity prices- hedgers and speculators.
Hedgers: Hedgers generally are industries or businesses that require a huge quantity of raw materials. Due to this, they enter into commodity futures contracts to reduce or hedge their exposure to price volatility.
Speculators: Speculators are those commodity traders who do not require the physical possession of the underlying commodities. They participate in commodities trading in the commodities market with the aim of earning profits from the commodity price fluctuations.
Things to Note Before Entering The Commodities Market
Commodity prices are affected by various reasons. Just like investing in the stock market, you must understand all the factors that affect commodity prices and learn how it works before you start commodities trading.
While the return prospects may seem to be great in commodity trading, it also comes with greater risk as the fluctuation in the commodity markets are common.
You must monitor the commodity prices and your investments regularly. This will help you take the right decisions about buying/selling at the right time.
To Sum Up
Entering the commodities markets in India for commodity trading is a great investment strategy to beat inflation. This is because the prices of commodities generally tend to go up when the rate of inflation rises. However, you must note that commodity futures contracts are risk-prone as they are highly leveraged. Hence, no matter which trading strategy you use for commodity trading, you must monitor the commodity market’s live prices regularly.
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