What is Commodities Trading

Stocks, mutual funds, and bonds come to mind when we think about investment avenues. But materials of daily use are also great investment options. Some examples are commodities like cotton, wheat, and copper.

Commodities play a key role in spurring economic growth. They connect countries through trade and commerce. Like stocks, commodities trade as investment instruments at commodities markets around the world. In fact, these markets complete trades worth billions of dollars each day.

Commodities market traders come from diverse backgrounds. They can be farmers who want to protect themselves from falling food grain prices, or brokerage houses who want to make big profits for their clients. They may also be business owners who use commodities as production inputs. They trade in commodity futures to protect themselves from an increase in the price of their input commodities. Whatever your interest may be – risk minimization or profit maximisation – the commodity futures market can cater to it.

Commodity Futures also have some structural attributes that make them an important component of an investor’s portfolios. One of these attributes is that they let you take bigger positions than your means allow. Taking bigger positions means that investing the same amount in commodities can earn you higher returns than investing it in a conventional investment option.

Commodities are also an excellent investment alternative for building a well-balanced investment portfolio. Keep in mind the rising uncertainty about macroeconomic, geopolitical, and industry-specific factors. You need to look beyond conventional investment options like stocks and bonds. Commodity futures serve this need well.

Another big advantage of commodity futures is that entering and exiting these investments is very easy. You don’t have to go through an elaborate process for this, as you may have to when buying or selling real estate, for example. You can simply login to your account, fulfil the margin requirements and execute the trade. The exchange will see the transaction through from there on.

In India, commodity trading is relatively new. The country’s two biggest commodity exchanges only came up in 2003. But individuals and institutions are fast realising the benefits of commodities trading. An increasing number of investors are now setting aside a portion of their investment portfolio for commodities trading.

At present, commodities can be traded on three national-level exchanges in the country: Multi Commodity Exchange of India Ltd (MCX), National Commodity and Derivative Exchange (NCDEX) and National Multi Commodity Exchange of India Ltd (NMCE). There are also 21 smaller exchanges that offer commodities trading at the regional level. The annual turnover of India’s five leading commodities exchanges stands at over Rs. 65 lakh crore.

Trading on all the commodity exchanges In India was regulated by Forward Markets Commission (FMC) till 2015, when it was merged with Securities Exchange Board of India (SEBI). Since the merger, it is the securities market regulator SEBI that regulates commodities trading in the country.

What next?

The next chapter provides a brief history of the Indian commodity market. Thus, we begin our journey towards understanding commodity markets.

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