Commodity trading is the buying or selling of commodities. They are a category of asset/goods (usually natural resources) which:
Holds commercial value in our day-to-day life
Are Exchangeable
Are moveable from one place to another
Commodity trading is the trading (buying or selling) of these commodities. In simple words, like stocks are traded invest in Equity Trading, goods are traded in commodity trading. This trading takes place on a commodities exchange, wherein various commodities and/or their derivative products are traded (i.e. bought or sold).
The Indian commodity trading market dates back to 1875. The major commodity trading exchanges in our country are:
Multi Commodity Exchange of India (MCX)
National Commodity and Derivatives Exchange (NCDEX)
Indian Commodity Exchange Limited (ICEX) *
Many regional exchanges also provide trading in commodity futures. MCX is the largest (trade volume wise) commodity derivative exchange in India. TradeSmart offers online trading facility in MCX.
*National Multi Commodity Exchange of India Ltd (NMCE) got merged with ICEX in 2018.
Exchange based commodity trading in India can happen either in the spot market or the futures market. The trading in the spot market happens instantly and is done in exchange for cash. Physical commodity trading companiesensure immediate delivery through actual delivery (or the exchange of warehouse receipts till such delivery).In the futures market, transaction is done electronically wherein the buyer and seller agree to fulfill their obligations at a future date and specific price.Commodities Options Trading India was approved in 2017. Gold futures were the first commodity option to get traded.
Commodities can be broadly divided into two groups – soft and hard.
What is a soft commodity?
Soft commodities are grown and are perishable or have a shorter life span. For instance, rice, wheat, spices, etc. The prices of soft commodities are prone to fluctuations.
What is a hard commodity?
Hard commodities, on the other hand, are extracted or mined. For instance, oil, aluminum, etc. the market for hard commodities is generally less volatile in the short run.
While investing in commodities, you need to remember that there is no “best” strategy that will work for everyone. A good and balanced commodity trading strategy is one which takes into account the below factors:
Prevailing trends
(medium as well as long-term) as they can be good pointers for probable market movements.
Technical indicators
Indicators such as moving averages, etc as they can help you take your exit/entry decisions.
Market research
Research backed decisions rather than emotions. Focused investments and patience go a long way in generating lucrative returns in this market.
Seasonality
Demand and supply of certain commodities depend on seasons and hence the price levels also fluctuate accordingly.
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Commodity trading in India takes place on all business days (between Monday to Friday). The trading hours depend on the exchange. For instance,
Commodity Trading in India can be grouped into five major categories-
There are two kinds of options – American (parties can exercise their buying or selling right before the expiration date) and European (parties can exercise their right only on the date of option contract expiration). In Indian commodity trading, only European style options are permitted.
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