It is always better to understand the concept, gain decent knowledge about anything you want to deal with. The same applies to trading or investing, be it equity shares, commodities, or any other investment product.
In India, most of the investors or traders, even those who casually deal in the stock market, are aware of working in the equity share market. Although they know the term commodity market but are not aware of its working. So, in this article let us try to understand the basics of the commodity market.
The commodity market is much similar to the equity share market, with slight differences.
Securities Exchange Board of India (SEBI) is the regulator for commodity markets as well. The platforms for equity share trading in NSE, BSE similarly for commodities trading you have the platforms MCX stands for Multi Commodity Exchange, NCDEX stands for National Commodities and Derivatives Exchange, and NSE, BSE as well.
Why should you deal in the commodity market?
Why should you deal in commodities that might be a question in your mind? A normal investor or a trader knows about equity shares and that’s why he puts his money in shares. Along with it, certain traditional methods of investment like FDs, PPFs, etc. are known to all. To diversify your portfolio, you should put your money in different products available.
Most of you must have heard the saying “don’t put all eggs in one basket”. The concept applies to your money. Find different opportunities where your money can grow.
You already know it
This might not be an exact example of the commodity market working, but with this, you will easily become familiar with the concept.
Almost all of us have purchased gold or silver, which might be for investment purposes or for home use.
Purchasing and selling gold can be taken as a transaction in the commodity market. But then how come you don’t know about the commodity market if you have done a deal in it? It is because there were so many parties involved. You did not directly go to the market to buy pure gold, you visited the jewelry shop, placed an order of ornaments or bar of gold at a fixed price, and book your delivery.
The price fixed at that time was because of some order placed by the jeweler earlier. And that is where a transaction in the commodity market happened without your knowledge.
So, how can you deal directly in the commodity market?
Just like for buying and selling shares you need a DEMAT account and trading account, you need them for commodity markets as well. Now here you do not buy a stake in any company, rather you are purchasing a commodity, just like you purchase goods.
There are so many commodities available, which are later explained. You can buy any of them of your choice, any amount but at a price determined by market forces, majorly demand and supply.
Just like shares you can deal in commodities at the current price or future price. If you are not willing to take the physical delivery of the commodity then you must square off all the open positions before monthly expiry.
For beginners, CFDs are also a good option to trade in this market. Contract For Difference means that the contract is done only for the difference in price. Profit is booked with price fluctuation; the buyer is not required to own the asset. The buyer simply has to pay the difference between the current price and the price at the time of contract.
What commodities can you deal in?
There are a number of commodities you can buy or sell on a commodity exchange. Commodities like iron, copper, aluminum, nickel. Along with other metals like silver, gold can also be traded in.
Apart from the metal commodities, you can also go for commodities like oil, natural gas, coal, and uranium. Agricultural commodities like sugar, cocoa, wheat, cotton, soya, etc. are also traded on exchanges. You can categorize most of the commodities into four groups namely Bullion, Base Metals, Energy, and Agri commodities.
How are prices decided in the commodities market?
The major force determining prices, be it stock market or commodity market, is demand and supply. Apart from demand and supply some other factors also influence the prices of various commodities. Some of them are weather, fluctuation of currencies, trade relations among countries, the economic condition in the country, and global markets.
A well-balanced portfolio will be least affected by the fluctuations in different markets. One should always try to allocate his money to different products according to his risk profile. Debt, equity, commodity, real estate, and many more options are available. You just need to assess your risk profit before investing.