Finance

Learn all about Commodity Trading and its Types

In the trading school, yes commodity is the favorite subject to select that can be happened to any trader. Commodities are lovable for years, as they are just like a Maths sum, hard to understand, hard to get answers but with practice, you can solve it easily. Let’s get in-depth about, what is commodity trading?

The commodities market is one of the foundations of the global trade system. For a trader, the important aspect is the knowledge in how to trade commodities is vital: great profits can be made If a trader has in-depth expertise in the issues driving commodity prices, and understand the mechanics of trading in commodities.

In short, a commodity is a basic good or raw material in commerce that individuals or institutions buy or sell. Also, commodities are considered to be the building blocks for more complex goods and trading services.

Commodity trading is either carried out with spot markets or futures markets. In spot marketing, the trading is done immediately, in returns of cash or other commodities. In future markets, the buyers and sellers trade a commodity based on a standardized contract. There is no need to compulsorily make or accept deliveries of physical goods here. Trade-in futures contracts happen electronically and returns could be a form of cash.

There are generally four categories of commodities

Agricultural – The category includes food crops like corn, cotton, and soybeans, etc and livestock like cattle, hogs and pork bellies, etc. Also, industrial crops like lumber, rubber, jute, wool, etc. NCDEX that is National Commodity and Derivative Exchange is the platform for the traders in Agricultural in India. MCX has it but the volume is too higher in that.

Energy – Energy trading includes petroleum products such as crude oil and gasoline, natural gas, heating oil, coal, uranium, ethanol, and electricity. MCX in India is the top exchange for Energy with Crude oil and Natural Gas Trading. 

Metals – Trading of metals including gold, silver, platinum, and palladium and base metals like aluminium, nickel, steel, iron ore, tin, and zinc. Here also MCX is the major exchange for metals like aluminium, copper, lead, nickel, zinc, and brass of cause, recently introduced for trading.

Environmental – This category of trading includes commodities like carbon emissions, renewable energy certificates, and white certificates. As far as now, India is not having any of these products to trade but these can be traded in NSE that is the National Stock exchange.

In the commodity market, the price of futures contracts increases with maturity. The contract with the nearest contract month is priced the lowest. On the other hand, the contract with the most distant contract month is priced the highest.

There are both spot market trading and futures trading in India. A commodity futures contract is an agreement to buy or sell a particular amount of a commodity at a fixed date in the future at a predetermined price. These contacts point out further details, like the quality of the commodity and the delivery location.

As an investor, you can take a long position that Is to buy a contract or a short position that is to sell it. If you expect the price of a commodity to risk, you can take a long position. If you except the price to fall, you can go for a short position.

Signing these contracts helps the buyer of the commodities to avoid the risk associated with price fluctuations of products or raw materials. For example, if a manufacturer of the copper commodity may buy a contract for protection against rising steel prices. On the other hand, the sellers of commodities enter into contracts to lock in a price for their products. For example, the oil company may take a contract to guard against a fall in oil prices in the future.

If you are looking to trade or invest in commodities online get in touch with SMTI India (Stock Pro Online) the top online stock trading advisory in India.

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