All You Need to Know About What is Commodity Trading & How it Works?

Throughout history, goods and commodities have been traded all over the world. Even before the invention of money, people exchanged items in marketplaces. But today’s commodity market has gone through a massive evolution from what it was.

You can trade goods like pulses, oils, minerals, precious metals, and farming products in India. You can conduct the commodity trade online through trading brokers. But, to trade in the Indian commodity market, you need to understand 

• what commodity trading is, 
• the types of commodities you can trade in, and 
• how it works. 

It is similar to equity trading, where you can buy and sell goods in the commodities market at a current or future price.

What is Commodity Trading?

You can buy and sell goods on commodity exchanges just like on stock exchanges. The commodity exchange allows you to buy and sell different goods for profit.

The Indian commodity market exchanges are:

• The Multi Commodity Exchange (MCX),
• National Commodities and Derivatives Exchange (NCDEX),
• Indian Commodity Exchange, and National Multi Commodity Exchange.

Classification of Commodities in the Today’s Commodity Market

Commodities are various items that you use daily. You can use them to produce different finished products or use them in their original form. Today’s commodity market times divide goods into four main groups. They are as follows:

Agriculture Commodities: These commodities are products that result from harvesting various crops. Some examples are 

1. wheat 
2. ragi 
3. sugar 
4. cotton 
5. barley 
6. peppercorns 
7. tea 
8. coffee, etc.

Metal Commodities: Metals used for producing other items fall in this class. They are 

1. aluminium, 
2. Silver, 
3. Iron, 
4. Nickel, 
5. Gold, 
6. Copper, 
7. Tin, etc.

Energy Commodities: Your life relies on these commodities to run or transport things. Examples are

1. coal,
2. natural gas,
3. crude oil,
4. uranium, etc.

Bullion Commodities: A bullion is a precious metal you buy on the commodity market. They include silver and gold.

How does Commodity Trading in the Indian Commodity Market Work?

You can do commodity trading in India through the following ways:

1) Commodity Trading by Futures Contract:

The best way to trade commodities is through this method. It involves an agreement or contract. You and another trader decide to buy or sell an item at a specific price at a future date. Suppose you are the buyer. You must pay the seller the specified amount when the commodity is delivered on the agreed date. You will have to pay the amount regardless of the movement of the commodity’s price in the market.

2) Commodity Trading by Investing in Commodity ETFs and Mutual Funds:

If you want to invest in the commodity market in times of volatility with lesser risk, these are the best methods. You have to invest in

• a commodity exchange-traded fund (ETF) or
• mutual fund scheme which invests in a specific commodity for you.

3) Commodity Trading by Direct Investment:

This method makes it possible to trade for certain commodities like gold and silver. But, if you want to invest or trade in bulkier items or involve large amounts, there are more workable ways to do commodity trading. Furthermore, this way of commodity trading for larger quantities comes with logistical difficulties.

4) Commodity Trading by Investing in Stocks:

Investing in the stocks of companies associated with a certain commodity is another method of trading on the Indian commodity market. It is not a direct method of making the trade, but it could benefit you if the prices of the stock increase in the future. For example, you can trade in an energy company that produces crude oil by buying its stocks.

How Can Commodity Trading in Today’s Commodity Market Benefit You?

Some of the benefits that you can get by trading commodities are as follows:

1) Acts as a Hedge Against Inflation:

If you are an investor, trading in commodities can work as a hedge in times of inflation. The prices of commodities rise during inflation. This is because their relationship with it is opposite. Stock prices and currency valuation reduce if the country’s inflation levels are high.

2) Diversification of Portfolio:

Commodities can diversify your portfolio during low market times. During calamities or economic downturns, prices tend to rise across the board. It will help you to reduce losses from other investment assets.

3) More Time to Trade:

The commodity market does not operate like the stock markets. Some specific commodity markets give you a long time to trade. Your trading can improve in some international commodities markets with this extended timeframe. It can help you to make more profits on your trades.

4) Higher Leverage:

You can trade in the commodities market with higher leverage provided by the brokers. Higher leverage means more money to invest in buying goods. It helps increase your gains when the commodity’s price moves in your favour.

5) Possibilities of Increased Gains Due to Volatility:

The commodity market during times of volatility can allow you to make higher returns on your investment. This market makes many upward and downward price movements. Thus, when you time your entry accurately, it can help you to get good profits.

Conclusion

Today, commodity market trading is an excellent way to make a good return on your investment. But you need to know what you are doing in this market to make it work. So take the time and effort to understand how the commodity market operates first, as knowledge is the key here.

Moreover, choose wisely how you want to trade in the commodity market. Most importantly, take the help of an expert in the subject like Piramal Finance, who can guide and help you in the commodity market.