It is the raw material that we put into other products that we use in our lives.

In the morning when we get up, we use cotton in the form of the shirt that we wear. While we are having breakfast we use the commodity sugar, wheat, corn or oats. When we use our car for travelling to office, we are using crude oil in the form of petrol/diesel.

Anything that is not created by man directly is an example of a commodity.

The types of commodities are metals (lead, nickel, aluminium etc.). These are used by manufacturers. There are precious metals as well for e.g. gold, silver etc. Metals are known as hard commodities for obvious reasons. Then there are agricultural commodities which are also known as soft commodities for e.g. Soybeans, coffee, etc. And then there are energy commodities like oil, gas etc.

Now that we know what a commodity is, let us understand what is commodity trading.

Commodity trading is buying and selling of commodities either through physical form or through derivatives trading using spot prices, forwards, futures and options on futures.

A fixed percentage of the cost of commodity can be paid to take a trade in the commodity futures market.

Suppose a commodities futures contract of 100 gms is worth Rs 280000 and 5% is set as the margin amount, then only payment of Rs 14000 is to be made as payment. By making only a fraction of the price, we can buy futures representing a large amount of that commodity.

Now lets talk about the Indian commodity market.

Did you know that the Indian commodity market is older than the Indian stock market?

For generations we have been investing in gold. Even today investors closely watch the correlation between investments in gold and shares. Gold is always considered to be the safe haven for Indian investors when the market underperforms.

This is one of the significant reasons to invest in commodities as it is not fundamentally related to the stock market performance. It can serve as effective hedging instruments.

Currently the are exchanges are National Commodities and Derivatives Exchange (NCDEX), Multi Commodity Exchange (MCX), ACE Derivatives and Commodity Exchange has shut down recently whereas NMCE has merged with ICEX, NMCE stands for National Multi Commodity Exchange and ICEX stands for Indian Commodity Exchange.

Commodities are a good instrument if one is sitting on cash during volatile times or when global uncertainty prevails. This is because the commodity markets move in opposite direction compared to equities generally especially during downturns. It is also an efficient manner to diversify the portfolio.

Thank you for watching this video!