For a layman, commodity market refers to the market where raw and primary products are bought and sold. But for an investor, it means a large plethora of opportunities and much more. To get a clearer insight of the Commodity Markets in India, please click on this part of Aditya Trading Solutions (ATS) Investor Education Series.
What are commodities?
Commodities are easy to understand and commodity markets are global in nature, hence less risk for manipulation.
Ask anyone and he/she will probably say "oil, copper, Gold, silver". The person is right in saying so, but that doesn't explain how a commodity becomes a commodity.
It is the key to understand commodities. Fungibility lets you trade huge quantities of all the so-called commodities at one price. An example of fungibility is Gold; Gold in India is same as Gold in China or US, as long as it has the same purity.
So, fungibility simplifies the commodity markets. There is no differentiation between products—your one barrel of crude oil is same as someone else's one barrel of crude oil. No brands, no labels. Price move in direct response to changes in expected supply and expected demand.
Types of Commodities— Segment Wise (MCX & NCDEX)
• Gold • Silver • Steel • Copper • Zinc • Nickel • Lead & Aluminium
• Crude Palm Oil • Mustard Seed • Castor Seed
• Brent Crude • Sweet Crude Oil • Furnace Oil
• Cotton • Sugar • Guy
• Pepper • Guar Seed • Soy Bean • Jeera • Chilli • Turmeric
Why Investing in Commodities?
Adding commodities exposure will increase your returns while lowering your risk. Commodities as asset class, helps achieve portfolio diversification. When stocks and bonds head south, commodities tend to head north. If in 2008, your entire portfolio was in stocks, you would have hit the wall. But a look at commodities will explain how diversification helps: While stocks fell over 30 per cent, commodities rose by over 30 per cent. So, if you had both in portfolio, you would have just saved would wealth. Of course there are no free lunches. Commodities are risky and their value fluctuates widely overtime. But when built into a solid asset allocation plan, they can, and have, boosted risk-adjusted returns.
Commodity Exchanges in India
Commodity Exchange: It's an association that organizes trading in commodities
In India, at present, there are 3 national level commodities exchanges namely National Multi-Commodity Exchange of India (NMCE), National Commodity and Derivatives Exchange Ltd (NCDEX) and Multi Commodity Exchange of India Ltd (MU) and 21 regional exchanges allowed for derivatives trading of agricultural commodities
Role of Commodity Exchanges
• Platform for hedging and speculation • Standardization of futures • Facilitation of real price discovery • Ensue mg fair play Track of business transacted • Fixing rules for uachng • Dissemination of information
Type of Commodity Markets...
• Spot markets for commodities are popular only for physical exchange of goods from one party to another for cash, where they may be of use for the buyer
• issues in this market are the lack of clarity of contract size of commodities, for settlement, and the period involved, which may vary from two days to 45 days
• The most popular form of trading in commodity markets is carried out in the futures market, where the contract size of every lot of commodity is pre-determined, and the date of expiry of options and futures is also earmarked in advance
• Futures trading performs two important functions, namely, price discovery and price risk management with reference to the given commodity
The final step...
Broker: You will need a broker to trade on the exchange. Most of the brokers today offer online trading platform too. Exchanges can provide you the list of their respective members and then you can choose your own broker.
Min. Investment: One can start with as low as Rs 5,000. One just needs the money for margins payable upfront to exchanges through brokers which range from 5-10 per cent of the value of the commodity contract.
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