What is Commodity Trading and How to Trade in Commodity Market?

What is Commodity Trading and How to Trade in Commodity Market? Commodity Trading Brokerage Charges: If you want to know What is commodity trading? If you want to know about then you should read this article completely. Commodity trading is an essential trading type in the global financial field.

Actually, commodity trade involves the buying and selling of primary commodities by traders, such as agricultural products ( wheat, coffee, and soybeans), energy resources (such as crude oil and natural gas), and metals (including gold, silver, and copper).

These commodities hold intrinsic value and are used in various industries. On the one hand, commodity trading allows producers to hedge against price fluctuations by locking in future prices through contracts.

It provides stability and certainty in an unpredictable market. On the other hand, investors and traders engage in commodity trading to make profits from price movements, supply and demand imbalances, and exploit market trends.

Commodity markets are quite complex ecosystems that are affected by factors such as market conditions, geopolitical events, technological advances, and economic indicators. Therefore, to do commodity trading, traders must have a deep understanding of it and the ability to take instant decisions. In this article, what is commodity trading? what are the advantages and disadvantages of commodity trading?

What is Commodity Trading?

Commodity trading is the buying, selling, and trading of raw materials or primary products within dedicated commodity markets. Commodity markets provide facilities for the exchange of commodities, which are generally classified into hard and soft commodities.

Hard commodities include natural resources such as gold, rubber, and oil that require extraction, while soft commodities include agricultural products such as wheat, coffee, and livestock such as pork.

Commodity trading generally has two major aspects, the spot markets, which involve immediate delivery, and the derivatives market, which involves future delivery. Producers, consumers, traders, investors, and intermediaries are actively involved in commodity trading.

Not every broker usually provides the facility of commodity trading, there are only a few broker companies that provide the facility of commodity trading. Historically, the trading of commodities dates back to early human civilizations, which predates modern financial markets. “What is Commodity Trading and How to Trade in Commodity Market? Commodity Trading Brokerage Charges”

Benefits of Commodity Trading

• Geopolitical events such as conflicts, wars, and disruptions in supply chains can cause scarcity of resources, leading to a rise in commodity prices. Investing in commodities can act as a hedge during such events. When geopolitical uncertainty causes stock prices to fall, commodities can provide stability.

• Commodity derivatives like futures and options offer a high degree of leverage.  This high leverage can amplify returns, making commodity trades an attractive option for those seeking big profits.

• Commodities exhibit a negative or low connection with stocks, making them an effective diversification tool for investment portfolios. When stock prices are negatively impacted by factors like inflation or economic downturns, commodities often perform better.

• Certain commodities, especially precious metals like gold, have been historically considered a reliable store of value during times of high inflation. During inflation, as the currency depreciates, the price of commodities such as gold remains stable, or in some cases even increases in value, providing protection to investors during inflation.

• The prices of commodities often move in opposition to stocks. During periods of high market volatility or economic uncertainty in the stock market, commodities can act as a counterbalance to the fluctuations in the stock market. This inverse relationship makes commodities an attractive option for investors, who is seeking stability.

• Commodities offer a way to hedge against specific risks. For example:- agricultural commodities can be used to hedge against adverse weather conditions that could impact crop yields. This risk management aspect can be valuable for companies and investors dependent on specific raw materials.

Also Read: What is Intraday Trading and How to Start Intraday Trading?

Disadvantage of Commodity Trading

• While high leverage in commodity trading can amplify gains, it also increases the risk of substantial losses. With relatively low upfront margins required for commodity derivatives, traders can take on large positions with limited capital. However, even small price movements can lead to significant profit or loss, and excessive leverage can expose traders to greater risk if not managed carefully.

• Commodity prices are known for their high volatility. The prices of commodities are influenced by various factors, including supply and demand, geopolitical tensions, (current example- Russia & Ukraine), and natural disasters.

• Commodity trade involves understanding complex supply chains, geopolitical events, and macroeconomic factors that impact the prices of different commodities. This complexity can make it challenging for individual investors to accurately predict price movements and make instant decisions.

• The commodities market can sometimes be susceptible to manipulation by large traders or organizations. Additionally, manipulation in the commodity market affects the price movement of the commodity.

• Some commodity derivatives involve the possibility of physical delivery of the underlying commodity.

• While certain commodities like oil and gold are highly liquid, others may have lower trading volumes and liquidity. These concerns can result in wider bid-ask spreads and difficulties in executing trades at desired prices, especially for less-traded commodities.

How to Trade in Commodity Market?

Follow the steps given below to trade in the commodity market-

• First of all, choose a commodity broker, you can choose full-time and discount brokers for your preference.
• After selecting the broker, open a demat account and trading account with the necessary documents like a PAN card, and an Aadhaar card.
• After creating an account, make an initial deposit of 10% of the contract value of the commodity you wish to trade.

Also Read: Top 5 Screen Sharing Apps for Android and iPhone in 2023

Types of Commodity Markets

Spot Markets:- Spot Markets is also known as cash market these markets involve the immediate trading and settlement of physical commodities. Buyers and sellers meet in person to decide on transaction prices and terms, and transactions are usually made in cash with immediate delivery of the commodity.

Derivative Markets:- Derivatives like futures and options are financial instruments that derive their value from underlying assets such as commodities, stocks, or indices.

List of Commodity Exchanges in India

• MCX (Multi Commodity Exchange of India Ltd):- MCX or Multi Commodity Exchange of India Ltd, is the largest commodity derivatives exchange in India. It is established in 2003, MCX offers trading in various commodity derivative contracts, including bullion, industrial metals, energy, and agricultural commodities. With 556 registered members and a presence in over 700 cities and towns, MCX has a substantial national reach.
• NCDEX (National Commodity & Derivatives Exchange Limited):- NCDEX, the National Commodity & Derivatives Exchange Limited, is a professionally managed online commodity exchange in India. Established on April 23, 2003, and operating under 
  
  
• ICEX (Indian Commodity Exchange):-ICEX is the Indian Commodity Exchange, recognized as a commodity exchange regulated by the Securities and Exchange Board of India (SEBI). Established with a demutualized corporate structure, ICEX facilitates online trading, clearing, and settlement of commodity derivatives with a focus on best practices. “What is Commodity Trading and How to Trade in Commodity Market? Commodity Trading Brokerage Charges”
  

Also Read: Top 10 Best Face Changer App for Andriod and iPhone

Commodity Trading Brokerage charges

Different brokerage firms for commodity trading Different brokerages per executed order Fees are charged. Below we have explained the commodity trading brokerage charges in the table:-

Conclusion

Commodity trading plays an important role in the Indian stock market and the global stock market. Commodities like gold, oil, agricultural products, energy resources, etc. are usually bought and sold in commodity trading. These commodities hold intrinsic value and are used in almost all industries.

Many events happening around the world cause fluctuations in the prices of commodities. Wars, contractions, and conflicts often drive up the value of these commodities, which traders and trade boys can take advantage of. Commodities also provide protection during inflation or market volatility.

Manipulation risks from large traders or organizations and the possibility of physical delivery in some derivatives underscore the intricacies. While certain commodities boast high liquidity, others face challenges in execution due to lower trading volumes. “What is Commodity Trading and How to Trade in Commodity Market? Commodity Trading Brokerage Charges”

Also Read: How to Order PVC Aadhar Card 2023 {New Update}

FAQs