Commodity Trading Basics
by 5paisa Research Team Last Updated: 2022-03-23T14:12:01+05:30
Listen icon


In the commodity market, the government regulates the commodity market through various acts, rules, and guidelines to handle commodity trading in India. Commodity trading is done primarily on the exchanges. It includes trading in commodities like futures, options, forwards, swaps, any other financial instrument or contract or derivative instrument linked to commodities or index or based on prices of any commodity.

What Are Commodity Market Instruments?

Commodity market instruments are market mechanisms that facilitate commerce in areas in which not enough supply is readily available. Various investors, companies trade these and other entities to earn monetary gains while minimizing risks.

They enable the exchange process of tangible goods while making use of the intangible value of these commodities. Oil, gold, silver, coffee, etc., are popular commodities traded in the commodity market instruments.

Commodities can be broadly classified into three categories:

1. Agricultural products like -wheat, rice, fruits, and vegetables, etc.
2. Metals like -copper, zinc, gold, and silver, etc.
3. Energy products like -gas, crude oil, etc.

Commodity Trading Basics

An essential feature of commodity markets in India is its highly dispersed network comprising regional commodity exchanges in different states/regions and national-level exchanges.

The Indian market is made up of numerous regional markets in different states. Regional exchanges are crucial because agro-climatic conditions differ from place to place across the country because even within a state, there can be significant variation in agro-climatic conditions.

This leads to significant differences in the prices of grains across regions within India. For instance, prices in Delhi are significantly higher than that in other parts because Delhi has a long history as an urbanized centre with increased demand for food items due to rapid population growth, large concentration of business process outsourcing (BPO) companies who have employees working long office hours, etc.

The commodity market in India is a large, syndicated, organized market for trading and clearing every kind of commodity product. A commodity is the basic goods that are used in commerce interchangeable with other commodities of the same type.

Commodity Market in Terms of Spot, Forward, and Option Trading

A commodity market is the set of venues where buyers and sellers trade commodity contracts. It is the physical place where buyers and sellers meet to conduct business. The commodity market is also termed a futures market because it mainly deals with futures contracts (a derivative).

Spot Market

The spot market in commodity exchange is where buyers and sellers come together to negotiate for immediate delivery of the commodity. The spot market in India provides delivery in cash or through counter-purchase or payment against documents.
Delivery can be in cash or by transfer of title from one party to another on delivery of the commodity. In spot transactions, there is no element of future price determination or speculation involved.

Forward Markets

Forward markets allow buying and selling at future dates when prices may be higher or lower than today's prices. Futures markets allow trading with delivery and payment occurring on a specific date in the future at a price agreed upon today.

Options Contracts

Options contract provides the buyer with the right but not the obligation to buy or sell an underlying asset or instrument at an agreed-upon price within a specified period or on a specific date. Options are similar to futures contracts except that options give the buyer the right, but not the obligation, to sell or purchase an underlying asset at an agreed-upon price within a specified time or on a specific date.

How Commodity Market Works?

The law of demand and supply primarily governs the commodity market. The market equilibrium is reached when the demand equals the supply. The process of trading in commodities takes place in four stages. They are:

Stage 1
The commodity market in India begins with the production of commodities. This stage is known as primary production. Primary producers are cultivators, animal rearers, miners, etc., that bring their produce to markets for selling.

Stage 2
The next stage is converting raw materials into finished products like cotton into yarn or cloth, wheat into flour, or rice into rice powder. This stage is known as secondary production.

Stage 3
The next stage involves the sale of finished goods to consumers by traders, wholesalers, and retailers. This stage is known as distribution trade.

Stage 4
After-sale, the commodity market in India ends at this stage, which is known as the consumption or use of goods and services by individuals and institutions for their own needs or use in further processing or production.

How Commodity Trading Works?

The stock markets in India offer several choices when it comes to investing in stocks. If you are looking for a more stable investment option, then commodity markets in India are an excellent option for you.
The exchange provided information about the current bids and offered prices of the given commodity for sale. This information is obtained from the dealers who post these bids and offers. The commodity market in India has three main segments that include:

A) Stock exchanges provide a platform for buyers and sellers of commodities to meet. These exchanges will maintain a list of commodities, which they add to regularly according to demand and supply patterns. You can trade these commodities through the exchange or from your broker's office, or online from the comfort of your home.

B) Brokers are also active participants in the commodity market in India. They take care of all transactions between buyers and sellers at the risk of their capital under an agreement with their clients called 'contracts.'

C) Commodities are also traded through forward contracts between farmers and exporters/importers who want to hedge against price fluctuations.

Wrapping Up

The commodity market in India is one of the largest and fastest-growing in the world. It is also one of the largest commodity markets in India and offers excellent opportunities for those looking to take advantage of commodity market investments.

Open Free Demat Account
Resend OTP
Please Enter OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.