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Basics of Commodities Market

By News Canvass | Jul 05, 2022

Commodities are bought and sold within the exchange within the same way that stocks are traded within the securities market. As a price discovery method for several goods and commodities, this financial market is often utilized by producers, manufacturers, and wholesale dealers.

There are dedicated commodity exchanges, like there are dedicated stock exchanges, that allow market players to conveniently buy and sell commodities online. India currently has three principal commodity exchanges:

  1.  The Multi exchange (MCX),
  2.  The National Commodity and Derivatives Exchange (NCDEX),
  3. And the Indian commodities market (ICEX).

What are the various sorts of commodities traded?

Most traders and investors simply divide commodities into agricultural and non-agricultural categories. Non-agricultural commodities are divided into three groups:

• bullion,
• energy,
• and base metals

Here’s a fast rundown of the various varieties of commodities that are commonly purchased and sold on the exchanges under each category.

  • Gold and silver bullion
  • Crude oil and gas are two forms of energy.
  • Agriculture includes, among other things, black pepper, cardamom, castor seed, cotton, palm oil, kapas, wheat, paddy, chana, bajra, barley, and sugar.
  • Aluminium, copper, lead, nickel, and zinc are samples of base metals.

To begin investing in commodities, we want to first open a trading account along with our preferred securities firm.

We just need a trading account, not a Demat account, because commodities are actual things instead of electronically housed securities.

We’ll invest in commodities in one amongst two ways: through a derivative or an options contract.

Derivatives include both futures and options. They get their value from the underlying asset, which is the commodity during this case. Once we buy or sell a derivative contract, we’re effectively agreeing to shop for or sell the underlying asset at a set price and quantity at a future date.

Let’s observe an example to assist us grasp the notion of commodity investment. Assume we’re pondering investing in gold. We’ll do so by using our trading account to shop for a gold derivative instrument or a gold options contract.

Assume we get a derivative for 10 grams of gold for about Rs. 52,000. The contract is up for renewal in an exceedingly month.

We’ve essentially agreed to amass 10 grams of gold for Rs. 52,000 on a future date one month from now by signing this contract. Let’s pretend we retain the contract till it expires. the vendor who sold the ten grams of gold is obligated to physically deliver the stipulated quantity when the contract expires.

Our path into the exchange, like other internet investments, begins with the need to open a trading account with a brokerage business. After we’ve founded our trading account and are able to invest, we will use derivative contracts like futures and options to speculate within the commodities of our choice.

When we buy commodity derivative contracts and retain them until they expire, we want to settle them by physical delivery.

If we do not want to receive delivery of the commodities we’ve purchased, ensure to shut all open positions long before the contract expires.

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