Commodity Trading
Commodity trading is a term used to define an activity where various commodities and the products derived from it are purchases and sold. In simple words, commodity trade is trading of any basic interchangeable good that is used in commerce, asserting its type to be similar of the original good.
Similar to what is advised when investing in Stock market, one should diversify the asset portfolio while investing-in/buying commodities.
Types Of Commodities
Before beginning commodity trading, one must understand and learn about different commodity types that are available for trade. Some common categories include:
- Agricultural products such as chana, soya bean, jeera, rice, rubber
- Energy products such as natural gas, crude oil, coal
- Metals such as aluminium, copper, lead, and other precious metals like gold and silver, etc.
Commodity Exchanges
Participating in the commodity market in India comes with its own set of challenges and know-hows. One must know that trading of commodities takes place within a regulated market, and traders may choose not to take delivery of commodities, instead deal in Futures contracts which are an agreement to buy or sell a fixed quantity of a commodity at a pre-decided price within a stated expiry date.
National commodity exchanges of India are:
- Multi Commodity Exchange of India Ltd (MCX)
- National Stock Exchange (NSE)
- Bombay Stock Exchange (BSE)
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICEX)
Commodity Futures Trading
There is a big number of traders in the commodity market that trade through Futures contracts. Renowned Businesses use Futures to hedge against the prices of commodities, which is done to minimise the risk of financial loss. It must be mentioned that the commodity market of India also draws participation from speculators.
Benefits Of Trading in Commodity
Diversification
Commodity returns have little to no correlation to returns from other assets. A Commodity is an individual asset class, and these can be considered to diversify an investment portfolio.
Inflation safeguard
Commodities are considered a respectable hedge against inflation as their prices have a tendency to rise during periods of high inflation. Helping maintain the purchasing power parity.
Hedge against event risk
Supply interruptions during an economic crisis, natural disaster, or a war have a huge probability of pushing the prices of commodities. However, trading in commodities can help one guard against loss by leveraging strategically on price swings. Let us understand the above through an example:
To lock in the input price of a raw material, a consumer could take a long hedge by buying a Futures contract based on the commodities price today. Meanwhile, a producer aiming for a high sale price could choose a short hedge by selling a Futures contract.