What are commodities?
A commodity is a universal term for any kind of marketable product produced to compensate for wants. Economic commodities comprise and services.
What is the commodity market?
These markets are the kind of markets where all the raw products are traded. These raw materials are traded on regulated commodities exchanges, inside whichever they buy and sell in standardized contracts.
It is one of the most popular forms of trading and across the world.
The commodity market in India talks under the regulation of (SEBI) Securities and exchange board of India. There is 24 commodity exchange in India. whether the considerable one is (MCX) multi-commodity exchange. National commodity and derivatives exchange (NCDEX). National multi-commodity Exchange (NMCE), etc.
It is begin in the middle of the 19th century just when businessmen set about organizing market forums to make the selling and purchasing of commodities simpler. This forum is on the condition that a place for purchaser and supplier set the standard and establish rules of business.
What is a Commodity exchange?
it is defined as a company, as well as any corporate body that arranges to trade in commodities. Earlier the commodity exchange was more like an open marketplace where traders would call their bids and purchase commodities.
It is an exchange where different types of commodities and derivatives items are commerce. maximum commodity markets over the world marketing in raw materials. It is traded in standardized contracts of different maturities call futures contracts. It is regulated by SEBI.
These are normally marketing futures contracts on commodities, like trading contracts to receive something, say corn, in an available month. a breakfast meal cereal producer bought the agreement now and guarantees the price will never go high whenever it is delivered. Then it will protect the farmers from the price drops and the buyers from a price rise.
Role of commodity exchange
- Dissemination of information.
- Track of business transacted.
- Fixing rules for trading.
- A platform for hedging and speculation.
- Standardization of futures.
- Ensuring fair play.
Types of commodity market
There are different types of commodity markets;
- Spot Market: bought & sold for cash and the delivery takes place immediately.
- Forward Market: the trading takes place directly between the buyer & seller. Terms such as qty, quality, delivery date, and price and negotiated between buyer and seller.
- Future trading: Futures trading in commodities results in transparent and fair price discovery due to the large-scale participation from all entities associated with the value chains involved.
How does commodity trading work?
- It all starts when you buy a futures contract of any of the commodities being traded on the exchange. Here you don’t pay the entire amount of the commodity but only the fixed percent of the cost, which is known as the margin.
- You could sell this contract any time before expiry could be after one month, two months, and so on, only if you sell the of course contract before it expires.
- As stock prices are quoted daily in the stock markets in the same manner as the commodity, futures prices are quoted on the commodity exchanges.
Both sides of trading commodities
The good side of trading commodities:
- Over the years commodity trading is gaining popularity because of the various benefits it offers.
- Commodity futures are universally accepted to be a part of every successful and diversified investment portfolio.
- It is an option to transfer risk.
- Commodity exchange provides a fair market for price discovery.
- Commodity exchange always provides hedging opportunities, which is the biggest advantage of investing in the commodity market is for the producers, importers.
- It protects from the effects of inflation and this trading is highly transparent.
The bad side of trading commodities:
- Commodity trading has been considered as something just for the experts as it is a risky venture.
- The risk factors likely the stable nature of the number of products that can be obtained after the production process, national monetary policies, inflation, etc. related to the commodity trading may affect the returns.
In conclusion, after a deep study on the topic of what is the commodity market and how its works. It covers the objective which I have set ( complete information about what is a commodity market, its history, background, what is commodity exchange, what its role of it, its types, how the commodity market works, and what are the good and bad sides of it).
I have observes that commodity markets are very important trading and hence commodity market can be traced to the times when all the human civilizations started to evolve. They are just another class of assets, as likely as equity or bonds. This all provides me the knowledge of what is commodity market and commodity exchange which is an association as a corporate body that organizes trading in commodities.
The commodity exchange plays a role where it is a type of platform for hedging and speculation. In simple words, I must say this commodities market is one of the oldest open markets in the world. Its main purpose is to carry out free trade and conclusion agreements for procurement and selling goods at formed market prices under the influence of supply and demand. It provides the proper facilitation to the buyers and sellers in the market. I believe that the commodity exchange is the best way for serving the market proper buying-selling process.
As the majority of Indian investors are not aware of the organized commodity market. Many of them have the wrong impression about the commodity market in their minds. The Concerned authorities have to take initiative to make the commodity trading process easy and simple. After giving too much effort by the buyers and sellers the commodity exchange market is growing rapidly with the best ideas of the organizers and with the perfect trading in a positive way. I have learned that it is a widely circulated commodity exchange market all over the world.
You may refer to this video if you want the explanation in Hindi