Introduction to Commodity Market
Commodity market is virtual marketplace for buying, selling and trading raw or primary products. For investors’ purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.
A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as ‘futures’ are traded in exchanges
Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)
Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.
Investors may trade commodities for either speculative purposes or as a hedge against a future price change. People familiar with stock-trading techniques may be curious about this investment option too. But as we’ll explain later on, the strategies and risks associated with commodities are quite different than common stocks.
Finally, the real purpose of commodity futures, or any futures contract for that matter, is to facilitate the transfer of risk from one entity to another. On either side of any deal there are two parties. Each party has a different outlook on the future. Each participant is willing to take on the risk of price increases or declines over time.
That’s what makes commodity trading so intriguing. An investor can find someone that thinks very differently than they do, and are willing to take a position in a commodity that opposes their own viewpoint. For traders or speculators that like the rush of a good competition, there aren’t many investments more competitive than trading in commodities.