Commodities are products of daily use that can be bought or sold. While there are products that we can buy or sell as individuals, we normally cannot invest in them today and sell them later at a profit or loss without physically holding them. Further, products that are not available in retail are out of reach of individuals. With commodity trading exchanges that have been set up, individual investors can now trade in commodities which were previously not feasible. Commodities that can be traded in can be broadly categorized into four categories
To start off with commodity trading, once the initial online trading account is open and the stock exchange is chosen along with the broker, you need to look for information on commodities in daily financial newspapers that carry spot prices and relevant news and articles on most commodities. Brokers provide support with research and analysis, besides there are specialized magazines for subscriptions.
- Energy (gas, oil, heating oil, etc.)
- Agriculture (wheat, sugar, rice, etc.)
- Livestock and Meat (pork, cattle, etc.)
- Metals (gold, silver, etc.)
The are three approaches to commodity market trading and one can adopt a style based on their interests and objectives. They are:
Hedgers: They primarily guide themselves from price movements in the future by taking a position on a commodity today. Producer-hedgersreduce the risk of declining prices in the future when they actually produce the commodities. Consumer hedgers do just the opposite.
Speculators: They study the market and take a position to make a gain in the commodities market.Arbitrageurs: They take advantage of a price difference for the same commodity in different exchanges by buying commodities from one and selling in the other, or vice versa.
Example of commodity trading exchange
MCX is one of the three commodity exchange based in Mumbai that is independent and regulated by SEBI, and allows you to deal in the MCX commodity market.
You can trade in this exchange through a broker. You can get updates of live commodityprices using commodity live functionality of MCX, and also through your commodity broker.
Importance of Gold as a Commodity
One of the reasons for investing in gold (gold MCX in case MCX online is the exchange of choice)is because of its importance as the oldest precious metal and its value as a global currency. Gold has huge demand and supply and is spread across the globe. India amongst them is the largest market for gold jewelry and a key driver of the global gold demand. Two third of the Indian demand for gold comes from the rural parts of the country. Indian households have the largest stock of gold in the world and this is a consideration to be noted for the commodity market in India.
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