A commodity market is a place where buying and selling of raw material or we can say the trade of primary product can be possible. What kind of raw material & primary product such as oil, coffee beans, gold, etc. There are two kinds of commodities – Hard commodities and soft commodities. Here are hard commodities which are hard to extract such as gold, rubber, oil, etc. On the other side, soft commodities are agricultural products such as corn, wheat, coffee, sugar, soybean, etc.
Now, how does someone take entry into the commodity market for commodity trading ? Investors can get exposure to this market by investing their money into this via future’ contracts.
Commodity trading in India – Trading is not new in India, it’s been in our culture for so long. Earlier, people use to do trade by barter system which means people exchanged goods to fulfill their needs.
Commodity trading for beginners – For beginners, it’s simple to understand if they have exposure to the stock market. All things are almost the same but the only difference is the Commodity is used in the Commodity market and equity is used in the share market.
It’s advisable for beginners to do trading with the practice of a demo account first. Why demo account? Because it will help the beginner in trading as it’s a way of increasing beginner’s confidence.
Types of commodity market – It’s divided into Spot Market and also referred to as a derivative market. Here spot Market is known as cash market which means in this market buyers or sellers do exchange commodities but for immediate delivery.
Where the derivative market, it involves futures, options, and forwards.
Derivatives markets involve forwards, futures, and options. Forwards and futures are derivatives contracts that use the spot market as the underlying asset. These are contracts that give the owner control of the underlying at some point in the future, for a price agreed upon today. Only when the contracts expire would physical delivery of the commodity or other asset take place, and often traders will roll over or close out their contracts in order to avoid making or taking delivery altogether. Forwards and futures are generically the same, except that forwards are customizable and trade over-the-counter (OTC), whereas futures are standardized and traded on exchanges.
Examples of Commodities Markets
The major exchanges in the U.S., which trade commodities, are domiciled in Chicago and New York with several exchanges in other locations within the country. The Chicago Board of Trade (CBOT) was established in Chicago in 1848. Commodities traded on the CBOT include corn, gold, silver, soybeans, wheat, oats, rice, and ethanol.9 The Chicago Mercantile Exchange (CME) trades commodities such as milk, butter, feeder cattle, cattle, pork bellies, lumber, and lean hogs.10
The New York Mercantile Exchange (NYMEX) trades commodities on its exchange such as oil, gold, silver, copper, aluminum, palladium, platinum, heating oil, propane, and electricity.11 Formerly known as the New York Board of Trade (NYBOT), ICE Futures U.S. commodities include coffee, cocoa, orange juice, sugar, and ethanol trading on its exchange
Commodity Market Trading vs. Stock Trading
For most individual investors, accessing commodities markets, whether spot or derivatives, is untenable. Direct access to these markets typically requires a special brokerage account and/or certain permissions. Because commodities are considered an alternative asset class, pooled funds that traded commodities futures, such as CTAs, typically only allow accredited investors. Still, ordinary investors can gain indirect access to commodities via the stock market itself. Stocks on mining or materials companies tend to be correlated with commodities prices, and there are various ETFs now that track various.
Conclusion – Commodity market deals with hard and soft commodities both but most probably it’s same as share Market.