Today we will be talking about what is commodity trading. Every investor should be well-educated before taking up commodity trading on any asset class, be it equity, debt, commodity trading or currency trading. Each asset class requires complete knowledge before investing or trading activity.
In this video, we will help you to know about one such asset class that is commodity trading. So let\’s get started in simpler terms, commodities are raw materials, or the agricultural produce that can be bought and sold such as agricultural products, metals and energy. Commodity Trading can be classified as hard commodities and soft commodities. Hard commodities, like other natural resources that need to be extracted such as oil, gold, copper, etc, and soft commodities are the primary agricultural products such as rice, wheat, sugar, etc. Based on specific standards these commodities are traded in commodity markets, just like equity or securities are treated in the equity market.
A commodity market trades in primary economic sector, rather than manufactured products. It is a virtual or a physical marketplace for buying or selling commodities. Similar to share is one can trade in commodities in the markets. Unlike the NSE or BSE, there are separate exchanges for commodity trading in this asset class. MCX and NCDEX are the two most popular exchanges where commodity trading is done in India. The commodity market works differently as compared to the equity market. In case of equities the settlement cycle is T+2 that is on the second working day after the trade. Whereas in case of commodities, the settlement of Mark to market is done at T+1. Equity contracts require an investment of market price only while commodity contracts require an investment of margin requirement, which keeps on changing based on the changes in the price. However, commodity trading has its advantages.
Firstly, it allows diversification at improves risk adjusted returns. Secondly, it covers you against inflation as during inflation the value of money decreases. Whereas the prices of commodities usually tend to raise. Apart from the advantages that commodity trading provides. One must go through the following: one must have a well-planned commodity trading strategy before trading in commodities. Very well informed about the commodity that you’re going to trade in. Take it in parts first, go ahead with part-time trading, understand the market well, and then go forward as a full-time trader. Lastly, have patience and make it work strategically. In India reform initiatives for commodity markets took place slowly, but today Indian commodity futures market has increased its turnover many times over.
The total volume of trade in the 40 commodity future markets has increased in the last few years. MCX has also recorded the highest turnover of trade followed by NCDEX and NMCE. We all know that commodities are scarce resources with the growing demand and increasing population prices will increase in the future before being a trader or an investor, always ensure to observe the movement of commodities from a consumer’s point of view, to make a good trade.
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