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The most common types of financial markets are the stock market, bond market, foreign exchange market, and commodity market. The stock market is where shares of publicly traded companies are bought and sold.
This type of market provides investors with an opportunity to invest in specific companies and earn returns on their investments through dividends or appreciation. The commodity market is another market that traders deal in. You can learn the fundamentals of commodity trading from the information provided below and then invest in commodity trading. So let’s begin with what commodity trading is.
What Is Commodity Trading?
In simple terms, a commodity market is a physical or virtual marketplace where raw materials or primary products are bought and sold. These products can range from agricultural goods like wheat, corn, and coffee to precious metals like gold and silver. Commodity markets play a crucial role in the global economy as they provide an avenue for producers to sell their goods at competitive prices while allowing buyers to purchase these goods at reasonable rates.
How Commodity Trading Works
One of the main characteristics of commodity markets is that the prices of commodities are determined by supply and demand factors rather than by individual companies or governments. This means that fluctuations in the production, consumption, and availability of commodities can significantly impact their prices in these markets.
Another important aspect of commodity markets is that they often involve futures contracts, which allow traders to buy or sell commodities at predetermined prices on specific dates in the future. These contracts allow producers and buyers to hedge against price volatility by locking in prices ahead of time. Overall, commodity markets play an essential role in facilitating trade between producers and consumers around the world while helping manage price risks associated with primary products.
Five Reasons Why It Is Important to Know About Commodities
- Trading commodities can be a lucrative venture for savvy investors, but those just getting started may find it overwhelming.
- Knowing the basics of how commodities markets work can help new traders manage the risks associated with investing in these markets.
- Over the past few years, due to the advancement of technology, commodity trading has experienced an immense increase in popularity.
- Trading commodities can be a great way to diversify investments and generate additional income.
- Commodity trading involves the buying and selling of goods such as food, metals, and energy sources in order to make a profit. Often seen as an attractive option for investors due to its potential high returns, commodity trading can be both complicated and risky.
A Brief History of Commodity Trading Fundamentals
Commodity trading has been around for centuries, dating back to ancient civilisations such as the Greeks and Romans. These early traders exchanged goods such as spices, metals, and other valuable commodities. As trade routes expanded and technology advanced, commodity trading became an increasingly important part of the economy.
Commodity Trade in India
India is a well-versed land with enriching resources that can be traded and used globally. The history of commodity trading in India begins with the setting up of the Bombay Cotton Trade Association in 1875, where the foundation of futures was laid.
Later, the trade of commodities started in edible oilseed complexes, raw jute, bullion, and other raw materials.
Types of Commodities
Commodities are traded on specific exchanges, and traders can achieve their profit goals by buying or selling commodities using financial contracts.
- Metal Group: Metals such as copper, aluminium, and nickel, which are used for construction and manufacturing purposes, can be traded in the stock market. In addition to jewellery, precious metals such as silver, gold, and platinum are traded on the commodity market.
- Agriculture: Commodities in the agriculture sector include crops, livestock, and products such as cotton, sugar, wheat, etc.
- Energy: In the energy sector, commodities such as oil and natural gas are used. Other than that, you can count ethanol, fossil fuels, coal and electricity in these types of commodities.
Commodity trading is essentially a financial instrument that allows you to profit from price movements without taking ownership of the underlying financial assets.
Two Basics of Commodities Trading
To start with commodity trading, you need to first choose a reliable broker such as Share India. To start trading, you need to open a Demat account.
1. Open an online Demat account
A Demat account lets you trade in the stock market. You can trade commodities, currencies and other types of securities by simply opening a Demat account from a reputed broker. The choice for a stock broker is plenty, but sticking with a broker that can provide you with technology, value for money service, and fast transactions will be the best choice for your commodity trading.
Brokers like Share India are a perfect match for your commodity trade. You can learn more about Share India’s services and trading fees by visiting their website or downloading an app.
2. Deposit Fund
After opening a Demat account, you need to add some funds. You can deposit an amount that is around 5% or 10% of the contract value. The contract value depends upon the following asset, which is under the contract. So, accordingly, you need to maintain your margin and trade around your risk appetite.
Ways to Trade in Commodities
- A simple approach to trading in commodities is that you can directly invest in gold or silver commodities. You can also invest in other metals through direct investment.
- Another method is to purchase stocks that are based on energy, metals, and other raw materials.
- Other than this, you also get the option to invest in Exchange-Traded Funds (ETFs) or mutual funds, which are collections of different stocks and other financial instruments.
Conclusion
Commodity trading is a complex type of trading that involves a higher risk/reward ratio. If you want to invest in commodities, you must have a comprehensive plan that includes a goal and risk analysis for the following trade.
Commodity trading provides two major advantages: diversification and inflation protection over time.