Meaning Of Commodity Market, Types, Pros, And Cons
A commodity market is a place where different commodities are traded, including energy, precious metals, crude oil, and spices.
India just became able to trade futures for approximately 120 different commodities owing to the Forward Market of Commissions.
Consumable and non-perishable commodities are both acceptable investment options for investors with a portfolio diversification focus.
It will minimize risks for all investors and operate as a check on the skyrocketing inflation rate in the country.
Different Categories of Market Commodities
Commodities are separated into two groups: hard commodities and soft commodities.
Natural resources should always be extracted or utilized to produce hard commodities. Following are the two categories of hard commodities:
1) Metals, including copper, platinum, gold, silver, and zinc
2) Energy: Gasoline, diesel, heating oil, and crude oil
Soft commodities are those produced by cultivation and nurturing as contrary to depletion or mining. Soft commodities fall into one of two categories:
1) Products of agriculture comprise rice, corn, wheat, cotton, soybeans, coffee, salt, and sugar.
2) Animal products, also including feed cattle, live cattle, and eggs
How Many Exchanges Can You Find In India’s Commodity Market?
22 separate commodities exchanges have been established in India under the aegis of the Forward Markets Commission. In India, there are 4 widely used commodities exchanges for trading:
1) Indian Commodity Exchange (ICEX)
2) National Multi Commodity Exchange of India (NMCE)
3) Multi Commodity Exchange of India (MCX)
4) National Commodity and Derivative Exchange (NCDEX)
In contrast to the returns on equities and bonds, the commodity market has performed poorly. As a result, putting a little portion of your money into the commodities market is advantageous to many people.
Even if stock prices are on the decline, it will still enable them to generate a good return on investment. This aids in making up for the negative or decreased profits produced mostly by the capital sector.
Trading on margin
Commodity brokers provide a reduced trading margin compared to bond and stock market transactions.
Brokers are allowed to trade using borrowed money, which increases the value of each transaction for both speculators and hedgers.
While dealers in commodities might profit from large orders by promising payment in the future, assisting speculators to get a better return on their investments.
While some commodities tend to be volatile due to economic and capital market conditions, other commodities are stable according to economic and capital market conditions.
Crude oil is a good illustration of how volatile commodities can be. Due to significant supply changes, issues with the mining process, or general economic conditions, its price does not remain consistent.
Even though the market is volatile, stockholders invest in such commodities to make a profit and take a long or short position depending on their opinion of the market.
Investments in commodities solely seek to increase capital gains, whereas the stock and bond markets also offer periodic dividends and coupon payments.
To get large returns, however, the commodity market needs for true competence. By signing up with a specific commodity broker, anyone can trade on any recognized commodity market.
Because of how unstable the commodity market is, any changes in demand or production capacity can have a significant negative impact on pricing.
Because of the extreme volatility, prices are unable to remain constant, which results in huge returns being lost by investors.
Therefore, before choosing to trade in commodities, a person dealing in the commodity market should be well-versed in internal and external issues, such as the internal workings of the company or international trade.
To reduce further risk, one must also maintain supply and demand patterns.
The Indian commodities market is expanding and will do so even more. Despite being less well-known than other markets, the commodities market is crucial for risk management, setting prices, and having a positive impact on the Indian economy and the agricultural industry.