Commodities Demystified
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Commodities Demystifie

What is a Commodity?

Commodities are goods, uniform in quality, where each portion is the same as the other. For example; oil is a commodity because one barrel of oil is the same as the next. Similarly, 1 ounce of gold is the same as the next.

What is Commodity Trading?

There are two ways that commodities are traded, in spot markets, or as futures.

Spot market refers to trades that take place literally on the spot. The commodity is traded right then and there, usually for cash. This is spot trading.

Futures is not the actual good that is traded for; rather a contract to buy or sell that particular commodity for a particular price and for a certain date in the future. This is how most of the commodities trading is done. This is futures trading.

Futures trading is organized in commodities permitted by the government. At present, several goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the patronage of the commodity exchanges.

Did you know that worldwide trading volumes in commodities are 4-5 times that of trading in shares and stocks?

While most of us are familiar with investing in stocks and shares, commodities as a worldwide accepted asset class, can be an interesting way to have your money make money for you.

    Major Commodities Traded:

    • BULLION : Gold, Silver, Platinum
    • BASE METALS : Nickel, Tin, Copper, Zinc, Aluminum, Lead
    • FERROUS METALS : Steel Long
    • CEREALS : Wheat, Maize, Barley
    • SPICES : Pepper, Red Chilli, Jeera, Turmeric, Cardamom
    • ENERGY & GAS : Crude Oil, Natural Gas, Gasoline, Heating Oil, ATF,
      Electricity Futures
    • OIL & OIL SEEDS : Castor Seeds, Soy Bean, Refined Soy oil
    • FIBRE : Cotton
    • PULSES : Chana
    • PLANTATIONS : Rubber, Coffee
    • OTHERS : Guar Seed, Gur, Sugar, Guargum, Mentha Oil, Potato

    Who regulates the Commodity Market?

    Just as trading in shares and stocks, the equity market, is regulated by Securities and Exchange Board of India (SEBI), trading in commodity futures and the relevant exchanges viz. MCX (Multi Commodity Exchange of India Ltd.), NCDEX (National Commodity & Derivatives Exchange Ltd.), NMCE (National Multi-Commodity Exchange of India Limited), etc. are regulated by the Forward Markets Commission (FMC).

    Advantages of Commodity Trading

    • Lowest Margins Equity Futures usually have 10-25% margins, but commodities typically require 5-15% margins. For E.g. one lot of 100gm gold would have an approximate margin of Rs. 6000 only, against the cost of the actual quantity.

    • Extended Trading Hours Although trading hours for Equity Market is from 10:00am-3:30pm, you can leverage the extended trading hours in Commodities Market from 10.00am-11.30pm. So you can go trade even after your office hours.

    • Easy Access - Commodity trading uses a similar trading platform as that of shares and stocks.

    • Diversified Risk - Other than trading in Stocks & Shares, you can spread your risk by investing in Commodities that offer varied combination of risk-return trading strategies.

    • Hedge against inflation -Trading in Commodities is a hedge against inflation since the commodity markets typically move opposite to that of stocks & shares.

    • Global Opportunity Gold when traded on Commodity Exchanges has international price benchmarking which does not allow anyone to manipulate prices.

    • Physical delivery of goods- not a compulsion- A commodity demat account is not compulsory unless you intend to take delivery of goods.

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