A commodity market is where investors can trade a list of commodities such as precious metals, natural minerals, agricultural crops, crude oil, natural gas, and so on.
Commodities are frequently divided into two broad categories:
1. Hard commodities include natural resources such as gold, natural gas, rubber, oil, etc.
2. Soft commodities are agricultural or livestock products such as corn, rice, sugarcane, wheat, coffee, sugar, soybeans, and pork.
What Is a Commodity in the Stock Market?
The term commodity represents the commodity market’s trade component. Here is the list of commodities that are most common in the stock market.
- Raw materials include rice, grain, cereal, sugar, crude oil, and natural gas.
- Commodities that have been processed include energy sources, metals, and livestock.
- Tea, coffee, and cocoa are examples of soft commodities.
How are commodity products traded in India?
Commodities can be traded on both the spot and futures markets.
- In the spot market, the buyer takes ownership of the commodity immediately at the current spot price by purchasing it on the spot in real-time.
- Buyers in futures markets, on the other hand, buyers in futures markets pay for a contract to receive the commodity at an agreed-upon price in the near future as per the date finalized.
Commodity Market Types
Commodities are traded in either spot or derivative markets.
- Spot markets, also known as “physical markets” or “cash markets,” are markets in which traders swap commodities on the spot against cash, focusing on physical commodities and immediate delivery.
- Forwards, futures and options are all part of the derivatives market.
A forwards or futures contract gives the owner control of the underlying at a future date in exchange for today’s price. In these contracts, the commodity is typically delivered when the contract expires, using the spot market as the underlying asset.
What is the commodity futures contract?
A commodity futures contract is one of the important aspects of commodity trading. It guarantees that a trader will buy or sell a certain amount of their commodity at a predetermined rate and on a predetermined date and time. A trader is not required to pay a commodity’s full price when purchasing a futures contract. Instead, it requires them to have a predefined proportion of the original market price.
Factors Influencing Commodity Prices in the Commodity Market
The law of supply and demand also applies to the concept of commodity trading. According to it, the higher the demand for a commodity, the higher the price, whereas the lower the demand for a commodity, the lower the price. Similarly, If there is a large supply in the market, the price shall be low.
The future demand for a commodity is determined by its current and future uses. For example, when farmers anticipate a rice shortage, they are more likely to hoard it, causing its market price to rise.
We hope that now you know the basics of the Commodity and Commodity trading market in India. To learn about Commodity Trading, check out our Commodity Trading learning column.