All You Need to Know About Commodity Trading

by Libord Group One-stop Financial Services

What is Commodity Trading?

Introduction: Commodities are resources or raw materials that have value and can be bought and sold. They can be divided into two types: hard commodities, like metals and minerals, which are used to make other goods, and soft commodities, like agricultural products, which are consumed directly. Commodities are traded on markets or exchanges, where they need to meet certain quality standards. Traders can buy commodities directly or through contracts like options or futures. Trading commodities can help diversify investment portfolios, especially during times of stock market volatility, as commodity prices tend to move in the opposite direction of stocks.

About Commodity market: The commodities market is a place, either physical or virtual, where people can buy and sell raw or primary products like oil, gold, wheat, or coffee. The price of these products is determined by the basic rules of supply and demand. If there is a high demand for a particular commodity and limited supply, the price tends to go up. On the other hand, if the supply is high or the demand is low, the price may go down. The commodities market allows individuals and businesses to trade these goods based on their current or future value.

Types of commodities

There are many different markets where people trade various types of commodities. Commodities are things like metals, energy goods, agricultural products, and environmental goods.

The metal category includes things like iron, copper, aluminium, and precious metals like gold and silver. These metals are used in construction and manufacturing.

Energy goods are things like natural gas, oil, uranium, ethanol, coal, and electricity. These are used for energy in homes and industries.

Agricultural goods are products from farming and livestock, such as sugar, cocoa, cotton, grains, oilseeds, and eggs.

Environmental goods are things like renewable energy, carbon emission credits, and white certificates.

The most popular commodities traded globally include gold, silver, crude oil, natural gas, soybeans, cotton, wheat, corn, and coffee. These commodities are widely traded because they are in high demand and have an important role in various industries.

Types of commodities traded in India (Multi Commodity Exchange of India – MCX)

There are different types of commodities traded in India on the National Commodity and Derivatives Exchange (NCDEX). These commodities fall into various categories:

Agricultural Commodities: These include black pepper, castor seed, crude palm oil, cardamom, cotton, Mentha oil, rubber, and palm olein.

Energy Commodities: Natural gas and crude oil are traded as energy commodities.

Base Metals: Brass, aluminium, lead, copper, zinc, and nickel are categorized as base metals.

Bullion: Gold and silver are traded as bullion commodities.

Cereals and Pulses: Commodities such as maize (kharif/south), maize (rabi), barley, wheat, chana, moong, and paddy (basmati) fall into this category.

Soft Commodities: Sugar is classified as a soft commodity.

Fibres: Kappa's, cotton, guar seed, and guar gum are categorized as fibre commodities.

Spices: Pepper, jeera, turmeric, and coriander are traded as spice commodities.

Oil and Oilseeds: Castor seed, soybean, mustard seed, cottonseed oil cake, refined soy oil, and crude palm oil fall under this category.

In summary, these commodities represent different agricultural products, energy sources, base metals, bullion, cereals, pulses, soft commodities, fibres, spices, and oil-related products that are traded on the NCDEX in India.

Commodity Trading in India

A commodities exchange is a place where people can buy and sell various commodities and investment products in a standardized and regulated manner. In India, there are more than 20 exchanges where commodity trading takes place under the supervision of the Securities and Exchange Board of India (SEBI).

To participate in commodity trading, you will need three accounts: a Demat account, a Trading account, and a Bank account. The Demat account is like a digital storage for all your trades and holdings. However, you will require a broker to place orders on the exchanges.

India has six major commodity trading exchanges: National Multi Commodity Exchange India (NMCE), National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX), Indian Commodity Exchange (ICEX), National Stock Exchange (NSE), and Bombay Stock Exchange (BSE). These exchanges provide platforms for buying and selling commodities and related investment products.

Types of Commodity Market:

Commodity trading can take place in two types of markets: Spot Markets and Derivatives Markets.

Spot markets are also called cash markets or physical markets. In these markets, traders exchange physical commodities, meaning they buy and sell actual goods like wheat, oil, or gold, and the transactions are settled immediately.

Derivatives markets involve two types of contracts: futures and forwards. These contracts are based on the underlying assets in the spot market. With futures contracts, traders agree to buy or sell a commodity at a specific price on a future date. These contracts are standardized and traded on exchanges. On the other hand, forwards contracts are customizable and traded over the counter, meaning they are directly negotiated between two parties. When the contracts expire, the commodity is physically delivered.

So, the main difference between futures and forwards is that futures are traded on exchanges and have standard terms, while forwards are individually negotiated contracts. Both types of contracts are used to gain control of commodities in the future at a predetermined price.

What is a Commodity Futures Contract?

A commodity futures contract is an agreement where a trader agrees to buy or sell a certain amount of a commodity (like gold) at a specific price and time in the future. When a trader buys a futures contract, they do not have to pay the full price of the commodity upfront. Instead, they can pay a smaller amount called a margin, which is a percentage of the original price. This means that even with a small amount of money, they can control a larger amount of the precious metal.

Participants of commodity market:

Speculators are people who try to predict the future prices of commodities and make money by buying or selling contracts based on those predictions. They do not actually want to produce or own the commodities themselves.

Hedgers, on the other hand, are manufacturers or producers who use the commodity futures market to protect themselves against price fluctuations. For example, farmers can use futures contracts to offset potential losses if the prices of their crops fall.

Commodities can also be used as a protection against inflation. When prices are rising, investors may use commodities to prevent the loss of their money's value, as the prices of commodities tend to rise along with inflation.

Way to Investing in commodities

Here are the four major ways to invest in commodities:

Direct investment: This means physically buying and owning the actual commodity itself. For example, you could purchase gold bars or barrels of oil.

Futures contracts: Instead of buying the commodity directly, you can invest in futures contracts. These contracts are agreements to buy or sell a specific amount of the commodity at a predetermined price and date in the future.

Commodity ETFs: You can invest in Exchange-Traded Funds (ETFs) that specialize in commodities. These are investment funds that hold a variety of commodities, and by buying shares of the ETF, you indirectly invest in the underlying commodities.

Commodity shares: Another option is to buy shares of stock in companies or organizations that produce commodities. For instance, if you believe the price of oil will rise, you can invest in oil companies by purchasing their shares.

Each of these methods offers different levels of involvement and risk, so it is important to understand them and choose the one that aligns with your investment goals and preferences.

Advantages of commodity trading:

When inflation rises, it becomes more expensive for companies to borrow money, which can affect their profits and cause stock prices to fall.

However, during periods of high inflation, the prices of raw materials and primary goods also increase, making commodity trading potentially profitable.

In commodity trading, traders can take advantage of high leverage, meaning they can invest a small amount of money to control a larger position in the market. This allows even small price increases to result in significant profits.

Investing in commodities can help diversify an investment portfolio because the prices of raw materials do not necessarily move in the same direction as stock prices.

The commodity market is regulated and transparent, with electronic trading platforms ensuring fair pricing and minimizing the risk of manipulation. This promotes broad participation and accurate price discovery.

Commodity trading service at Libord: -

Libord Brokerage Private Limited is a company that is registered with the Securities and Exchange Board of India (SEBI) and operates as a broker in various financial markets such as the BSE, NSE, and MCX. They offer services in commodity derivatives.

Libord has a dedicated research team that conducts analysis on the commodity derivatives market to help their customers provide investment advice. They also analyse changes in the Indian and global economies and assess how these changes may impact the financial and capital markets.

The company has a dynamic and well-trained team that efficiently handles client orders, queries, and requests. They offer investment advisory services to assist clients in making informed investment decisions.

Overall, Libord Brokerage Private Limited is a registered brokerage firm that offers a range of financial services, including trading in different market segments, investment analysis, advisory services, and the distribution of financial products. So, open your demat and trading accounts with Libord Brokerage Private Limited and start trading in the commodity market today.