A commodity market is a place where trading in commodities takes place. It’s one of the oldest markets in history. Rice futures getting traded in Japan in the 17th century are one of earliest instances of commodity trading. In India, the futures markets are localized for specific commodities. Examples are Kerala being an exchange of pepper, Ahmedabad for castor seeds and likewise.
Commodities traded in commodity markets
There are markets worldwide for almost all the commodities. It can be classified as below:
- Precious Metals: Gold, Silver, Platinum, etc.
- Other Metals: Nickel, Aluminum, Copper, etc.
- Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
- Soft Commodities: Coffee, Cocoa, Sugar, etc.
- Live-Stock: Live Cattle, Pork Bellies, etc.
- Energy: Crude Oil, Natural Gas, Gasoline, etc.
Segments of Commodity Markets
There are two segments of commodity markets: OTC (Over the Counter) market and exchange-traded market.
In the OTC market, the participants are the people who are closely involved with the particular commodity in which they’re trading such as farmer, wholesaler etc. The trading happens on the basis of bilateral understanding and there isn’t any formal structure of trading. Since almost all the trading taking place in this market is delivery-based, these markets are localized for specific commodities. In this market, the buyers, as well as sellers, have their own sets of brokers who negotiate the prices on their behalf. This market has spot as well as forward trades.
Exchange Traded Market
An exchange-traded market, also known as derivatives market is a place where commodities are traded over the exchange. It is highly standardized when compared with the OTC market. An exchange is required as an intermediary to all the commodity transactions and takes initial margin from both sides of the trade to act as a guarantee. Even though there is a provision for delivery, most of the contracts are settled in cash before they expire. Only 2% of all the trades result in actual delivery. The reason behind such low percent of delivery is that most people who trade in a commodity exchange only like to make a profit without actually receiving or giving physical delivery.
In most of the developed markets, the volume of commodity-based derivative market is nearly 5 times than that of the equity markets.
Trading in Commodity Market
Future contracts facilitate the activities of speculation, hedging, and arbitration to all the class of investors. Below are their details:
It actually facilitates speculators to trade while keeping in mind the movement of commodity prices. A small margin is paid to the exchange to take a speculative position and the contract can be squared-off during the trading hours.
Hedging is like an insurance against price movements. It provides an effective mechanism against the price movements of commodities. It doesn’t eventually avoid a price movement but reduces its impact.
Where there are different prices on different exchanges for the same commodity, and traders exploit such opportunities to make a profit, it is called arbitrage.
National Commodity Exchanges in India
Like stock exchanges, we have commodity exchanges in India where various commodities, derivative products, agricultural products, and other raw materials are traded. The commodity exchanges in India are:
- National Spot Exchange Limited (NSEL)
- Indian Commodity Exchange Limited (ICEX)
- Multi Commodity Exchange (MCX)
- National Commodity and Derivatives Exchange Limited (NCDEX)
- National Multi-Commodity Exchange of India Ltd (NMCE)
- Chamber of Commerce – Hapur (COC)
- Ace Derivatives & Commodity Exchange Ltd. (ACE)
- Bhatinda Om & Oil Exchange Ltd. (BOOE)
- Universal Commodity Exchange (UCX)
The commodity market in India is regulated by SEBI. Prior to Sep 2015, Forward Market Commission used to regulate it.
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