How does commodity trading work? The Indian commodity market is significantly developed and regulated. By commodity, we refer to standardised resources and raw materials used for producing refined goods. The commodity market is spread worldwide, and they trade various kinds of movable items. Two commodities types that primarily trade in the market are hard commodities, which are used as raw materials for manufacturing other items. The second commodity type is soft commodities which include items for initial consumption. These are agricultural and livestock products. And metals, energy, and crude oil are examples of hard goods. There exists a spot market for commodities. But besides that, raw materials are also traded on the exchanges. The goods must meet specific minimum standards to qualify for exchange trade. On the bourses, the primary mode of transaction in commodities is derivatives. A commodity is an asset class, and when approached with knowledge and understanding, it can offer returns beyond the scope of bonds and stocks. Before investing in goods, it is better to understand how the commodity trading works. How commodity market works There are physical and virtual commodity markets where interested parties trade goods at current or future dates, and the prices are dictated by the economic principles of demand and supply. The commodity market is a platform for buying and selling raw materials. In the spot market, goods are traded at current market prices. But traders also engage in trading commodity derivatives to hedge against market volatility. Commodity prices are highly volatile and go up and down in response to various economic factors, including the state of economics, weather, geo-political situations, election results, government policies, and others. Naturally, those who deal with commodities are concerned about price volatility. Hence, they use derivatives to safeguard their interest and mitigate risks. Commodity trading in India Commodity trading has a prominent history in India. However, colonisation and, later, government policies impacted India’s dominance in commodity trading. But the situation is changing, and currently, India has a well-developed commodity market and six commodity exchanges where various goods are traded. The primary Indian exchange is the Multi-commodity Exchange of India or MCX. Types of commodities traded in MCX
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