1. Overview: Commodity
What is commodity?
Commodity overview – In the trading business, various commodities and their derivatives are bought and sold. A commodity is any raw material or primary agricultural product that can be bought or sold, such as wheat, gold, or oil. By trading commodities, such commodities can diversify your portfolio.
Commodities are naturally occurring materials or goods that are collected and processed for human activity – such as oil, sugar, and precious metals. They are the basis of our economy because we need raw materials to produce food, energy, and clothing.
Goods are often mass-produced and standardized in terms of quality and quantity, meaning that their price is the same regardless of who makes them.
Commodity Trading in India
Commodities can be traded on the spot market or usually on Indian stock exchanges. Traders can engage in trading by buying and selling commodities on the spot or by entering into derivative contracts such as futures and options. Here, traders enter into contracts to buy or sell certain goods at a fixed price on a predetermined date. Regardless of whether prices are falling or rising, trades must be made according to the given prices and dates of the contracts purchased by the traders. In the case of futures contracts, the trade is a mandatory part of the contract, and the trader must buy or sell regardless of whether a profit is to be made or not.
Commodities trading in options contracts, on the other hand, gives traders the right to buy or sell commodities, but there is no obligation to complete the transactions. Commodities prices generally tend to move in the opposite direction to stocks. Therefore, commodity markets are a good way to hedge against stock market volatility. Additionally, you will see more activity in commodity markets when the stock market has periods of extreme volatility. Commodity prices are almost always dictated by demand and supply factors, as well as the economic and political conditions of each country (of course, supply and demand would be related to such variables).