Commodity market facilitates an exchange of physical goods among residents in a country. Individuals aiming to diversify their portfolio can undertake investments in both perishable and non-perishable products, thereby not only mitigating the risk factor, but also providing a hedge against inflation rates in an economy.
Types of Commodities in the market
Available for trading are categorised into the following classes, based on their inherent nature:
- Hard commodities
- Precious metals: Gold, platinum, copper, silver, etc.
- Energy: Crude oil, Natural gas, gasoline, etc.
- Soft commodities
- Agriculture: Soybeans, wheat, rice, coffee, corn, salt, etc.
- Livestock and meat: Live cattle, pork, feeder cattle, etc.
As of 2019, some examples of commodities in the market that were most commonly traded in major commodity exchanges in India included crude oil and silver. While crude oil acts as one of the most important energy sources required for virtually every industry, silver is one of the most precious metals other than gold with a steady demand.
As crude oil is not domestically available in abundance, almost 82% of it is imported from OPEC and Middle Eastern countries. Similarly, silver is traded in extensive quantities from countries such as Mexico, Peru, etc.
Major Commodity Exchanges in India:
- Multi Commodity Exchange of India
- National Multi Commodity Exchange of India
- Indian Commodity Exchange
- National Commodity and Derivatives Exchange
Types of Commodity Market:
- Spot markets are also known as “cash markets” or “physical markets” where traders exchange physical commodities, and that too for immediate delivery.
- Derivatives markets involve two types of commodity derivatives: futures and forwards; these derivatives contracts use the spot market as the underlying asset and give the owner control of the same at a point in the future for a price that is agreed upon in the present. When the contracts expire, the commodity or asset is delivered physically. The main difference between forwards and futures is that forwards can be customized and traded over the counter, whereas futures are traded on exchanges and are standardized.