A commodity is a raw resource or primary agricultural product that can be purchased or sold, such as gold, silver, crude oil, natural gas, and agricultural crops like wheat, rice, cotton, and others. Indian investors frequently trade commodities through platforms like the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).
Table of Contents
Commodity Definition
Commodity futures contracts, which are agreements to buy or sell a certain quantity of a commodity at a fixed price and date in the future, are what is involved in commodity trading in India. Commodity futures are a tool that investors can use to speculate on price changes in the commodities markets or use as a hedge against price volatility. The Securities and Exchange Board of India (SEBI) governs the operation of commodity exchanges, ensures the protection of investors’ interests, and regulates commodity trading in India.
Where Do Commodities Come from to Trade in the Share Market?
In accordance with the type of commodity, the origins of the commodities traded on share markets can vary.
- Certain commodities, like agricultural products, are cultivated or produced by farmers, while some, like metals and energy products, are removed from the earth by mining or drilling businesses.
- Commodities may occasionally be obtained from government warehouses or other organisations with sizable reserves.
- When a commodity is created, it is often transferred to storage facilities or straight to a commodity exchange, where it can be traded as a futures contract or an options contract.
- These contracts, which are traded on markets like the MCX and the NCDEX, reflect a standardised quantity and quality of the underlying commodity.
- The commodities traded on share markets come from a variety of sources and might change based on the commodity type and market conditions.
Who Are Commodity Speculators?
Speculators in commodities are people or organisations that trade in commodities with the main objective of profiting from changes in market prices. In the commodity exchange, these traders often buy and sell futures contracts or options contracts rather than taking actual delivery of the product.
Technical analysis, fundamental analysis, and macroeconomic research are just a few of the tactics that commodity speculators can employ to make money on the market for commodities. Additionally, they might borrow money or utilise leverage to increase their trading positions and possible gains (or losses).
Speculators are crucial in the commodity market because they offer liquidity, support efficient pricing, and ensure that prices accurately reflect supply and demand fundamentals. They can also be held accountable for escalating short-term price volatility, which can be harmful to producers and consumers who depend on stable prices.
In the commodity market, all traders are speculators; however, some may be commercial hedgers who trade futures contracts to guard against price fluctuations in the physical markets. Speculators, however, are more common and frequently represent a sizable portion of trading volume in the commodity market.
What Influences the Price of a Commodity?
Commodity traders must keep track of these factors in order to make informed trading decisions because they have a complex interplay of economic, political, and environmental influences on commodity prices. A number of factors, such as the following, can affect the price of a commodity:
Demand and Supply
The main element influencing a commodity’s price is supply and demand, a fundamental economic principle. Prices typically increase when demand for a commodity is high, and supply is constrained, and vice versa.
Weather Circumstances
Weather conditions have an impact on agricultural commodity prices because droughts, floods, and other natural disasters can reduce crop yields and cause price changes for commodities like wheat, corn, and soybeans.
Geographic Politics
Political unrest or conflicts in important producing or consuming nations can have an impact on commodity prices. The price of crude oil, for instance, may be impacted by political unrest in the Middle East.
Currency Keeps Changing
Changes in the dollar’s value relative to other currencies can have an impact on the price of commodities for international buyers and sellers because commodity prices are frequently expressed in US dollars.
Economic Expansion
Commodity demand may rise as a result of economic expansion as more resources are needed for infrastructure, manufacturing, and construction projects.
Costs of Transportation and Storing
Commodity prices can also be impacted by the price of storing and shipping those commodities, as high storage costs or delays in shipping can limit supply and drive up prices.
What Are the Types of Commodities?
The types of commodities traded on commodity exchanges can differ by region and exchange. Some exchanges might specialise in particular types of commodities. Commodities can be broadly categorised as follows:
Products of Agriculture
Raw materials such as grains, animals, and soft commodities such as cotton, coffee, sugar, and cocoa fall in this category. Weather conditions and other elements that affect crop yields frequently have an impact on agricultural commodities.
Energy Resources
These include renewable energy sources like wind, solar, and biofuels, as well as fossil fuels like coal, natural gas, and crude oil. Geopolitical developments, factors affecting supply and demand, and technological advancements all have an impact on energy commodities.
Materials Commodities
Base metals like copper, zinc, and aluminium are among them, as are precious metals like gold, silver, and platinum. The demand from different industries and economic growth both have an impact on the prices of metal commodities, which are frequently used in manufacturing and construction.
Livestock Products
Animals like cattle, hogs, and poultry are examples of these; they are traded on commodity exchanges as futures contracts. Weather conditions that affect the availability of feed and water, as well as supply and demand factors, all have an impact on the prices of livestock commodities.
Soft Products
These include products like rubber, cotton, and lumber that are grown rather than extracted. Weather conditions and demand from different industries both have an impact on soft commodities.
Industrial Products
Commodities like chemicals, plastics, and fertilisers that are used in industrial production are among them. Supply and demand dynamics, advancements in technology, and modifications to the manufacturing process all have an impact on industrial commodities.
Conclusion
A commodity is a base material, a primary agricultural or mineral product that can be purchased and sold on commodity exchanges, frequently through futures contracts. These goods can typically be substituted for other items of a similar type, and market supply and demand changes can affect their prices.
