Updated Feb 09, 2022

What are Commodities Market?

What is the Commodities Market?

If you were under the impression that the stock market was the only financial market in the world, you're in for a pleasant surprise. Although the stock market is the most widely traded financial market globally, many others are just as popular, including the currency and commodities markets. Let's go a bit further into the intricacies of the commodities market and attempt to grasp the fundamentals.

Understanding the Commodities Market

Commodities are bought and sold on the commodities market, like how shares of a limited company are exchanged on the stock market. This financial market is commonly used as a price discovery mechanism for a broad range of products and commodities by producers, manufacturers, and wholesale dealers.

Commodity markets are marketplaces where specific commodities are exchanged amongst participants according to predetermined rules and guidelines. Many commodity exchanges are functioning in the market, which helps control the trade of commodities. First and foremost, India has six national commodities exchanges, which are as follows:

• Multi Commodity Exchange (MCX)
• Indian Commodity Exchange (ICEX)
• ACE Derivatives Exchange (ACE)
• National Multi Commodity Exchange (NMCE)
• National Commodity and Derivatives Exchange (NCDEX)
• Universal Commodity Exchange (UCX)

When it comes to the Indian financial sector, demand and supply are everything. Demand and supply are dynamic, and as a result, they drive price changes for assets. To profit from the Indian financial sector, those interested in doing so search the market for such assets. Investing in stocks or bonds may be the end of the road for some investors, while for others, it is the beginning.

In contrast, investors willing to take a greater degree of risk tend to gravitate toward commodities. Commodities like pulses, spices, metal, and other products constantly change in price; therefore, investors want to buy cheap and sell high. Manufacturers employ commodities trading to protect themselves against price fluctuations and minimize their losses if prices fall suddenly.

How does the Commodity Market work?

To further understand how commodities markets function, let's look at an example. Consider the case of a precious metal like gold. Imagine you want to buy one gram of gold as an investment. As a result, you visit a commodities exchange, such as the MCX. You may buy a gold futures contract here.

Right now, you have the option of retaining or cancelling your agreement at the end of the specified period. An actual gram of gold will be given to you if the contract is held until its end. Alternatively, if you decide to close the deal after a few days, you'll walk away with a profit.

In the same way that the stock market makes it simpler for investors to purchase and sell stocks in companies, the commodity markets make it easier for people to buy and sell various commodities. Aside from commodity producers and consumers, there are several other participants in the commodity market.

Commodity markets are also populated with speculators, investors, and traders who hope to make money by taking advantage of price movements in these commodities to maximize their profits.

Types of Commodities

Let's take another diversion and take a quick visit to your neighbourhood grocer for a while. Isn't it true that you'll discover a diverse range of things for sale at that location? You'll find produced goods such as stationery items, cutlery, and clothing on display. In addition, you'll notice items that have been cultivated or manufactured, such as fruits and vegetables.

The commodities market is divided into two sorts of commodities: hard commodities and soft commodities. In a similar vein, the things exchanged on the commodity market may be clearly defined as one of these two types of commodities.

Hard Commodities

Natural resources such as metals and oil reserves, which serve as the foundation of a country's economy, are classified as hard commodities. Among other things, gold, silver, iron, steel, aluminium, and copper are all examples of hard commodities to be found. Metals like these are often important contributors to a country's export commerce because of their high value.

On a worldwide scale, these resources' demand for and availability can be tracked since the demand and supply for these hard commodities can be readily gauged or gambled.

Soft Commodities

Soft commodities are things that are produced by cultivation and nurturing. Consider agricultural items such as fruits and vegetables, cattle and other animals, and any other agricultural or connected products you can think of.

For this reason, unlike hard commodities, it is difficult to predict price changes in soft commodities, primarily because they are impacted by a variety of variables—for example, seasonal patterns and weather variations. And there's no way to foresee these kinds of events with any degree of accuracy in advance.

Conclusion

The commodities market has benefits as well as some drawbacks. However, commodities, especially gold, are considered as a hedge against inflation and a market slump. Before investing in the commodities market make sure to do the proper research.