Commodity Trading Basics
by 5paisa Research Team Last Updated: 2022-03-23T14:10:15+05:30
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Commodity Market Basics

A commodity market is a market where commodities are bought and sold. Commodities are goods or products that can be traded on any market in the world. Commodity markets exist for all sorts of raw materials, from wheat to steel to oil to coffee and other physical goods like gold, diamonds, other precious metals, silver, platinum, and other minerals.

The commodity markets are generally divided into two broad categories:


What is Commodity Market


Physical commodity markets trade things like raw materials and agricultural products; Futures markets trade contracts to deliver the underlying commodities at a specified price at an agreed-upon date in the future.

A commodity market is a market in which tradable goods are bought and sold. These goods are raw materials or primary agricultural products. Commodities are distinguished from manufactured items produced in factories using manufacturing processes and service industries.

What Is Commodity in Share Market?

The commodity market is the place where investors and traders buy and sell commodity assets.

Commodities can be divided into two types:

• Raw commodities produced by nature include corn, wheat, sugar, crude oil, and natural gas. The delivery of raw commodities like corn, soybeans and orange juice is typically based on a physical unit such as bushels or tons.

• Processed commodity products such as energy, metals, livestock and soft commodities like coffee and cocoa.


Commodities can be traded in either spot or futures markets. In the spot market, the buyer immediately pays for the commodity at the current spot price. In futures markets, buyers pay for a contract to receive the commodity in the future at an agreed-upon price. Processed products may also be traded in futures markets.

Categories of Commodities in Commodity Markets

Commodity markets can be loosely categorized into soft commodities and hard commodities, depending on the material traded. Soft commodities are wheat, sugarcane or coffee, while hard commodities are metals such as copper, gold or oil.

The commodity market for crude oil is often considered the most important of all commodity markets. Most oil is transformed into gasoline, diesel fuel, or other petroleum products at refineries before being sold to consumers.

Commodity Market


Some historians believe that the commodity markets began in ancient times; however, this is disputed because it was after the 19th century that they became well-established.

A commodity market is a market where the commodity is bought and sold. The commodity market is also known as commodity exchange or commodity bazaar or commodity board or bazaar. The commodities which are traded in the commodity market are food grains, metals, crude oil etc.



Factors Determining Commodity Prices

The law of demand and supply explains that the higher the demand for a commodity, the higher will be its price, whereas if there is a fall in demand for a commodity, its price will fall. The higher the supply of a commodity, the lower would be its price.

Demand for a commodity in future depends upon its present use and future use. For example, when people know that there will be a grain shortage next year due to some natural calamity, they will store grain in advance to meet their demand when it falls.

If people are aware that there will be excess grain production next year, they may decide not to store grain in advance because they know they can get it at lower rates later on.

The commodity market is the place where the trading of commodities takes place. Commodities share common characteristics such as durability and function, which is why they are considered homogeneous products.

Commodity Market Meaning Demystified

Commodity markets are where traders meet to exchange their commodity contracts for cash or other commodities or derivatives of the commodity. The commodities traded in these markets are mainly raw materials, agricultural products, fuels and metals. The nature of these markets is such that their prices fluctuate continuously depending on demand and supply conditions.

The main difference between the commodity market and the stock market is that in the commodity market, participants trade commodities directly with each other without using cash to buy and sell the same. In contrast, in-stock markets, people trade securities(shares) with each other using money to buy or sell.

The commodity market is the place where commodities are traded for future or spot delivery. Commodities are mainly agricultural products but can be produced in large quantities, including metals, fuels, and livestock.


Why Are Commodity Markets Referred to as Futures Markets?

The commodity markets are also known as futures markets because trading is conducted on an organized Futures exchange.

The first futures contracts were negotiated by farmers wishing to insure themselves against adverse crop price movements. They could lock in a guaranteed income by selling their harvests at a fixed price in the futures contract.

&Today there are many other uses for futures contracts: Stabilizing prices by ensuring buyers and sellers have equal access to the market; Hedging against price volatility; Speculating on future price movements of commodities; Providing investment exposure to commodities without having to take physical delivery of the product (+ more).

Unlike other financial instruments such as stocks or derivatives, they're based on one or two variables (e.g. stock price).

The Commodity Market is the market where raw materials are traded. Commodities are natural materials that are not processed into finished products. The commodity's spot price is the current price in the cash market for immediate delivery.

Wrapping Up

The term commodity means any merchandise shipped at random without being specifically on order. The use of the word commodity dates back to the 17th century, but it has evolved significantly over time. For example, corn futures were traded initially on an open outcry exchange but are now traded electronically.

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