Commodity Investment

A commodity is any good or service that can be exchanged for other goods and services in the marketplace. A commodity market is a place where these goods and services can be sold, bought, or traded. All the perishable and non-perishable items can be traded and hence come under the definition of a commodity.

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Commodity investment, in layman language, is the type of investment in which the investor invests their money in one or more commodities in the marketplace to attain profits and good returns. Let us understand commodity investment in detail and the kinds of diversification commodity investment options an investor can put their money in.

What is Commodity?

A commodity, as mentioned earlier, is any good exchanged with other goods of the same type. Commodity exchange has existed since early human life way before stock trading was introduced. Commodities are basically raw materials used as basics for the production of various goods and services that are further sold in the market.

Buying commodities help in the diversification of an investor’s portfolio as they are completely opposite of buying stocks from the market.

What is the commodity market?

A commodity market is a marketplace that facilitates the exchange of goods for immediate deliveries between the country’s residents. The main benefits of commodity investment in the market are:

  • Investments can be made in both short-term and long-term products

  • It helps in the diversification of the portfolio

  • Provides edge over fighting the inflation rates of the economy

  • Mitigation of the risk involved

Types of Commodity Investments

Commodity investment can be broadly divided into 2 parts, that is, Hard commodities and Soft commodities. The following products fall into these categories of commodity investment types:

  1. Hard Commodities

    • Energy

      • Natural gas, crude oil, gasoline, etc.

    • Precious metals

      • Gold, silver, platinum, copper, etc.

  2. Soft Commodities

    • Livestock and Meat

      • Poultry, live cattle, feeder cattle, pork, etc.

    • Agriculture

      • Wheat, rice, corn, salt, sugar, soybean, etc.

How to Invest in Commodity Market?

All exchanges under the commodity market in India fall under the (CDMR) Commodity Derivatives Market Regulation, regulated by the (SEBI) Securities Exchange Board of India, which is further merged with the Forward Market Commission 2015.

All the commodities in India are managed by the following 4 commodity exchanges:

(NCDEX) National Commodity and Derivatives Exchange

(MCX) Multi Commodity Exchange

(NMCE) National Multi Commodity Exchange

(ICEX) Indian Commodity Exchange

Types of Commodity Exchange

Commodity exchanges can be made in 2 broad ways:

  1. Physical Goods

    Physical goods are traded by commodity brokers and institutional investors. Their aim is to resell the products in the retail market.

  2. Derivative Contracts

    A derivative is an opposite of physical and all the transactions take place online with the help of digitized contracts. It is the new way of carrying out transactions hassle-free and easily without any physical stores involved.

Type of Traders in Commodity Investment

There are 2 types of traders in the commodity market based on operations:

  1. Hedgers

    Hedgers enter into future contracts rather than entering into current exposures of the market with the traders. Because of the futures trading, the current market rates do not affect the hedgers and the rate at which they trade with the investors.

  2. Speculators

    Speculators are investors who aim at generating profits from the current commodity market. The investors predict the future contracts depending upon various factors related to the commodity market, and make investments accordingly.

Price Determination in Commodity Exchange

Various factors help in determining the price of the commodity investment in an economy. Following are some of the major factors that help in determining the price in the commodity market:

  1. Supply and Demand of the Market

    The rise in demand means an increase in the price of a commodity due to higher demand and shorter supply. The constant battle of supply and demand is very overwhelming and small investors usually look for safer investment options rather than keeping a regular check on the commodity market.

  2. The Worldwide Scenario

    Any activity happening anywhere on the globe will have a direct impact on the commodity sale and purchase. For instance, the United States is the major supplier of petrol in the world. If any major turmoil occurs in the US, it will directly affect the price of petrol, globally and domestically.

  3. Market Outlook

    Chances of major changes in the price of particular commodities like precious metals are rare, hence drastic changes in the stock market make investors shift towards commodity investments. Commodity investments, therefore, are considered a safer investment option when compared to the stock market.

  4. External Factors

    The production of the commodity affects the price change of the commodity in the market. For instance, a rise in the production cost subsequently affects the selling price of the commodity, eventually affecting the equilibrium.

Why Invest in Commodity Market?

Following are the reasons why an investor should choose to invest in the commodity market above other investment markets:

  • Diversification of portfolio

  • Inflation hedge

  • Substantial returns

  • Lower margin in trading compared to stocks and bonds

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