Commodity Markets - A Glance | Thasneem Banu

COMMODITY MARKET – A GLANCE

 

People around us always speak about stock exchange, buying & selling shares, making profits and suffering losses. But many of us know only a little about commodity market.

Let’s get to know about commodity market clearly.

Beginning

The commodity market in India is over 100 years old but was officially established through a legal trading mechanism in the year 2003, headquartered at Mumbai. As every country relies on raw materials to grow, the commodities market has a special place in driving a country’s economy and allowing investors to profit along the way. It is regulated by SEBI (The Securities Exchange Board of India).

Meaning

• A commodity market is a place for investors to trade in commodities like precious metals, crude oil, natural gas, energy, spices and among others.
• It comprises both hard and soft commodities that are traded on the stock exchange.

Hard Commodities – consist of natural resources that is mined or extracted. They are classified into 2 categories:

1) Metals – Gold, Silver, Zinc, Copper, Platinum

2) Energy – Natural Gas, Crude oil, Gasoline, Heating oil

Soft Commodities – refer to those commodities that are grown and cared for rather than extracted or mined. They are classified into 2 categories:

1) Agriculture – Rice, Corn, Wheat, Cotton, Soybean, Coffee, Salt, Sugar

2) Livestock and meat – Feeder cattle, live cattle, egg

Commodity Exchanges in India

India has 22 commodity exchanges that have been setup.

The following commodity exchanges are popular choices for trading in India:

• Multi Commodity Exchange of India (MCX)
• Indian Commodity Exchange (ICEX)
• National Commodity and Derivative Exchange (NCDEX)
• National Multi Commodity Exchange of India (NMCX)

Types of Commodity Markets

Commodities that are traded typically sorted into 4 broad market categories:

Bullion: Gold, Silver

Metals: Aluminum, Brass, Copper, Lead, Nickel, Zinc

Energy: Crude oil, Natural gas

Agricultural Commodities: Black Pepper, Cardamom, Castor seed, Cotton, Crude palm oil, Mentha oil, Rubber

Commodity Trading Hour:

• The commodity market stays open from Monday to Friday
• Saturdays and Sundays are weekly holidays.
• The morning session starts at 9:00AM and lasts till 11.30PM.

How to trade in the commodities market?

You can trade in the commodities market through the following 2 contracts.

1. Forward Contract

• This contract is an agreement between two parties to sell or buy a certain commodity at a fixed price in the future.
• It hedges the risk for the buyer against price fluctuations and the seller can get a guaranteed price for his product at a specified date.
• Forward contracts are privately negotiated and contracts are entered into over the counter.

2. Futures Contract

• Future contract is an agreement between two parties who agree to buy or sell a particular asset at a specified date and at a pre-determined price.
• Future contracts are traded on recognised exchanges
• The payment and delivery of the asset are made at a future date, termed the delivery date. The contracts can be cash settled as well.

3. Option Contract

• An optionis a derivative contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying.

 

Participants of Commodity Market

There are 2 major participants in the commodity market.

• Speculators
• Hedgers

Speculators

• Speculators are traders in the commodity market that continuously check the price of commodities and tell the future price movement.
• If they expect the price to go upwards, they buy a commodity contract and instantly sell them as soon as the price goes upwards.
• Similarly, if they expect the price to go downwards, they sell their commodity contracts and buy back when the price falls.

Hedgers

• Hedgers are normally manufacturers and producers who protect themselves from the risk by using the commodity futures market.

 

Example: If a farmer expects that there will be fluctuations in the price during crop investing, he can hedge his position. To protect himself from the risk, he’ll enter into the futures contract.

• If the crop prices go down in the market, the farmer can compensate for all the loss and by booking profits in the future market.
• If the price of crop goes up during crop harvesting, the farmer can suffer from a loss in the future market, and he can repay it by selling his crop at a higher price in the local market.

Factors affecting commodity prices in an economy:

• Market demand and supply
• Global scenario
• Market outlook
• Speculative demand

Thanks for reading!

References:

1.www.angelone.in

2.www.indianinfoline.com

3.nirmalbang.com