Download Unicorn Signals App

Powered By EquityPandit
 Signals, Powered By  EquityPandit

What Is Commodity Trading: Definition, Types, and How It Works 

The commodities are basic raw materials that are used to produce goods for daily use.

Commodity trading is a trading method that involves the buying and selling of various tangible assets, including energy goods, metals, agricultural products and environmental goods. This method is a very age-old financial practice that has been the backbone of global trade for centuries. The value of Commodities is tied to real-world supply and demand along with other macroeconomic conditions, including changes in weather, technological advances, and political development. In this article, we will cover everything about commodity trading, including what it is, different types of commodities, how it works, and why it’s appealing to investors. 

What Are Commodities? 

The commodities are basic raw materials that are used to produce goods for daily use. They are the building blocks of a global economy; commodities include items such as sugar, metals, oil, natural gas, and many more. The different types of commodities that are traded in India can be categorised into four broad segments; 

Segment Commodities 
Bullion Gold and Silver.
Energy Natural Gas and Crude Oil.
Agriculture Rubber, Black Pepper, Cotton, Oil, Cardamom, Rise, Wheat, and many more.
Base MetalsAluminium, Lead, 

List of Commodity Exchanges in India

India has more than 20+ exchanges that facilitate commodity trading under the Securities and Exchange Board of India’s (SEBI) regulatory eye. The exchanges provide a platform for traders to trade in standardised contracts for commodities. Until 2015, the market was regulated by the Forward Markets Commission, which later merged with SEBI, creating a unified regulatory environment for commercial investing.

However, India has six prominent commodity trading exchanges of India are:

Exchange Name Year of EstablishmentCommodities Traded 
National Multi Commodity Exchange India2002Gold, Copper, Mustard, Aluminium, Rubber, Coffee, etc. 
National Commodity and Derivative Exchange2003Crude oil, oil and seed, Steel, Copper, Fibres, etc. 
Multi Commodity Exchange of India2003Bullion, Energy, Metal, Petrochemicals, pulses, etc. 
Indian Commodity Exchange2009Silver, Copper, Gold, Natural gas, Soyabean, etc. 
National Stock Exchange1994Bullion, Energy and Base Metals.
Bombay Stock Exchange1875Crude oil, Almond, Gold, Silver, Copper, Aluminium, etc.

How Does Commodity Trading Work?

The Indian stock market presents countless opportunities for investing in stocks, but for traders who seek a more secure investment avenue, commodity markets provide an excellent choice. The exchange displays crucial information regarding prices of financial securities and offered prices of certain commodities that are sourced from dealers who post these bids and offers. 

Types of Commodity Markets

Commodity trading can occur in spot markets or futures markets:

  1. Spot Markets: These kinds of markets are also called “cash markets” or “physical markets”, where traders exchange cash for the immediate delivery of physical commodities. 
  2. Futures Markets: In the future market, commodities are bought and sold for future delivery. 

Different Ways to Trade in Commodities 

  1. Direct Investment: 
  2. Purchasing Stocks: 
  3. Commodity ETFs and Mutual Funds:
  4. Bottom Line

Advantages of Commodity Trading 

  1. Diversification: Commodity trading provides investors with the opportunity to diversify their portfolio and mitigate risks, as commodity markets have a negative to low correlation to the stock market.
  2. Inflation Hedge: The rise of inflation results in the fall of stock price, whereas the cost of goods increases and makes the price of primary goods and raw materials rise. Thus, the rise in inflation results in commodity trading becoming profitable. 
  3. Transparency: The commodity market is highly regulated, ensuring fair practices, protecting investors, and maintaining market integrity. The modern electronic trading suite adds to the transparency and efficiency of the market, eliminating the risk of manipulation. 
  4. Substantial Returns: Certain commodities are known for their stability, while many commodities are subject to immense volatility. This volatility observed in many commodities creates opportunities for significant gains, enabling investors to capitalise on market fluctuations for higher returns.

Disadvantages of Commodity Trading

  1. High Volatility: The commodity market is subject to high volatility, which is driven by demand and supply.  
  2. Significant Investment: Generating significant returns in the commodity market requires trading with bulk investment. 

Tips for Successful Commodity Trading

  1. Research and Analysis: Conduct a thorough research and analysis of the market, including keeping up-to-date with supply and demand factors, commodity prices, geopolitical and economic events, and other factors affecting commodity prices.
  2. Setting Investment Goals and Risk Tolerance: It is crucial to establish an investment goal and risk tolerance levels, which are essential steps in creating a well-rounded investment strategy. This ensures alignment between your financial objectives and your willingness to accept risk.
  3. Creating a Strong Trading Plan: It’s very important to create a strong trading plan as it provides a perfect framework, helping you set a clear risk-reward ratio and maintain discipline in your trading activities.
  4. Risk Management: It is very crucial to mitigate risks, allowing you to identify, assess, and mitigate potential threats and enhance the overall stability and longevity of your portfolio.

Get Daily Prediction & Stocks Tips On Your Mobile