How does commodity trading work?

In the economic growth of all countries-developed, developing and least developed countries commodities are the backbone and play a major role. It is not relatively a new concept and Commodity Trading originated centuries ago, and the oldest evident can be traced back to 4500 BC when Sumerians used clay token sealed in clay vessels for an exchange for goats. Initially, seashells and pigs were used for trading later gold and silver came into the picture as metals were something related to royalty due to its character. Lastly, gold became dominant due to many factors. In today’s context concept is the same but the process has changed radically. There are many instances, which show that commodity trading existed during the period of Kautilya’s Arthashastra. In the US, futures trading only started in the mid-1800s and in 1848, the Chicago Board of Trade (CBOT) was set up. Also initially, the first stock exchange, the Amsterdam Stock Exchange, was a commodities market. India joined the club in 1875 with the establishment of the Bombay Cotton Trade Association (BCTA).

Commodity trading states to the selling of common goods and services that many people use. Here actual delivery of these goods and services does not take place and can be stated for simplicity it is related more to the worth of these goods and services.

The commodities market operates much like every other market. Commodity markets all over the world are operating on the idea of derivatives. Securities whose values are derived from one or more assets. In commodity businesses such as oil and gas, chemicals, metals, and agriculture, the rise and decline of global economic growth drive cyclical patterns.

All exchanges in India have both cash and delivery settlement systems. If one wishes to deliver the contract in cash, at the time of placing the order, he must state this. If one opts for the delivery of the goods, he must have the warehouse receipts required. There is no need to pay the entire money instead deposit a margin of money.

There are different ways to invest in commodities for example futures contracts, options, mutual funds, forward agreements indices, etc. The demand and supply theory forms the base of profitability in the trading of commodities. The price strategies are influenced by shifts in the demand and supply curve, and the profit margins tend to differ accordingly. The variance can be understood simply that the demand for every given commodity appears to decrease when prices are higher and vice versa.

A futures contract offers the safest way to invest in commodities. These contracts are used by traders to avoid the risks associated with the price swing of the futures’ indirect trade of goods or raw material imagining future Price appreciation/depreciation. It is possible to buy and sell a tradeable asset, just as you exchange in equity/shares. To trade in commodities you need to have a bank account, Demat account, PAN card, and valid address proof.

In 2015, the Forward Market Commission (FMC) regulatory body of the commodities trading merged with the Securities and Exchange Board of India (SEBI). The SEBI controls India's commodity market trading. The Commodity Derivatives Market Regulation Department (CDMRD) looks after day-to-day activities.

A commodity is further classified into the following categories:

Agro-based commodities – Wheat Corn, Coriander, Chana, Castor Seed, etc.

Energy –Crude Oil, Natural Gas, etc. · 

Base Metals – Copper, Gold, Silver, etc. 

Livestock and Meat –Eggs, Cattle, etc.

There are six national-level commodity exchanges in India

Multi Commodity Exchange of India Ltd (MCX) 

National Commodity & Derivatives Exchange Limited (NCDEX) 

ACE Derivative and Commodity Exchange Ltd  

Indian Commodity Exchange Limited (ICEX) 

National Multi-Commodity Exchange of India Ltd (NMCE) 

Universal Commodity Exchange (UCX)

The commodity markets in India, except for Saturdays, Sundays, and holidays announced by the exchange, are open on all days of the week. The timing is as follows: the exchange schedule for market timings is from Monday to Friday IST 9 am -5 pm while for international commodities’ trading can take place up to 11:30 pm.

People may not know much about stocks, but you would have a fair idea about the food you consume, such as eggs, meat, wheat, oil, sugar, jaggery, pulses, grains, etc. These are goods that you purchase regularly and are aware of the price changes about their prices and how these price changes happen seasonally as demand falls or rises. The prices of these goods are highly unpredictable because of global market instability, mismatch of demand-supply, seasonal change, and high liquidity, it is very difficult for an investor/trader to predict and take calculative risks. As the demand for commodities in the market rises at a rising pace and as stock markets become more and more volatile, commodity trading is becoming increasingly common. Commodity trading can be one of the best modes of investment with proper supervision and accurate fundamentals.

Commodity Trading can be profitable, but chances of failures are more and often result from risks that are poorly hedged. It is much more speculative in nature than other capital markets because the incentive for profit is far too high here. Speculators can cross any limits to produce income for themselves, which can hurt retail investors in turn sometimes. Because natural resources are located in various parts of the globe, it becomes difficult at times to forecast price movements.

As India is still developing and markets are, being developed, there is a need to emphasize better regulation for the protection of market participants. An active and energetic market is the need of the hour and hence must be developed. This will allow investors to calculate their risk, to speculate, and to benefit from unequal rates/prices. The agricultural sector in India provides maximum growth in terms of GDP. India is more likely to become a major hub for the exchange of goods and services. If done properly and educated to the farmers it can be a boon and probably the next chapter in India’s development. Thus In order to safeguard farmers by setting fair prices and retaining their buffer stocks, the established commodity derivative market in India is much needed.