A commodity is a group of assets/goods that are important in everyday life, such as food, energy, or metals. A commodity is alternate and exchangeable by nature. It can be categorized as every kind of movable good that can be bought and sold, except for actionable claims and money.
Commodity trading in India started way back in time, even before it did in many other countries. But, foreign invasions and ruling, natural calamities, and countless government policies and their amendments were major reasons for the diminishing of commodity trading. Today, even though there are various other forms of stock market/share market trades, commodity trading has regained its importance
Where to invest in commodities?
There are six major commodity trading exchanges in India as listed below.
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
In 2015, the regulatory body of the commodities trading – Forward Market Commission (FMC) merged with the Securities and Exchange Board of India (SEBI). Commodity trading in these exchanges requires standard agreements as per the instructions so that trades can be executed without visual inspection. In general, commodities are classified into four types:
- Metals – Silver, Gold, Platinum, and Copper
- Energy – Crude oil, Natural gas, Gasoline, and Heating oil
- Agriculture – Corn, Beans, Rice, Wheat, etc.,
- Livestock and Meat – Eggs, Pork, Cattle, etc.,
How to invest in commodities?
The best way to invest in commodities is through a futures contract, which is an agreement to buy or sell a specific quantity of a commodity at a set price at a future time. Futures are available on every category of commodity. Traders use these contracts as prevention towards the risks associated with the price swing of a futures’ implicit trade good or raw material. Trading in commodities involves high risk for amateur investors.
What are the advantages and disadvantages of futures?
Advantages of futures:
- Futures are highly leveraged investments
- Future markets are very liquid
- Futures give huge profits if traded carefully
- Affordable minimum-deposit accounts and controlled full-size contracts
- Long or short futures can be set as target easily
Disadvantages of futures:
- Futures markets are volatile
- Direct investment in the markets is of high-risk, especially for novice investors
- Gains and losses are magnified by leverage
- The unpredictable movement of trade even before you close your position
More than 100 commodities are traded in the commodity futures market. Out of these, 50+ commodities are actively traded. These include bullion, metals, agricultural commodities, energy products, etc.