What is Commodity Trading?

By Vijay in 4 Jul 2025 | 21:38
Vijay

Vijay

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Commodities are broadly classified into two main categories:


  1. Hard Commodities
    These are natural resources that are mined or extracted, such as:

    • Crude oil

    • Gold and silver

    • Natural gas

    • Industrial metals (Copper, Zinc, etc.)


  2. Soft Commodities
    These are agricultural products or livestock, including:

    • Wheat

    • Coffee

    • Sugar

    • Cotton

    • Soybeans


How is Commodity Trading Done?

Commodity trading happens primarily through futures contracts on regulated exchanges like:

  • MCX (Multi Commodity Exchange) – India

  • NCDEX (National Commodity & Derivatives Exchange) – India

  • CME (Chicago Mercantile Exchange) – Global

A futures contract is an agreement to buy or sell a specific quantity of a commodity at a predetermined price on a future date.


Why Do People Trade Commodities?


1. Hedging:
Producers and consumers (like farmers or airlines) use commodity futures to lock in prices and reduce the risk of price fluctuations.

2. Speculation:
Traders and investors aim to profit from price movements based on supply-demand dynamics, geopolitical risks, or weather patterns.

3. Diversification:
Commodities often behave differently from stocks and bonds, offering a way to diversify your portfolio.


 Factors Influencing Commodity Prices


  • Weather conditions (especially for agricultural commodities)

  • Geopolitical tensions (affecting oil and gas)

  • Global demand and supply

  • Government policies and subsidies

  • Currency movements (since commodities are often priced in USD)


Risks Involved


Like any financial market, commodity trading comes with risks:

  • High volatility

  • Leverage-related losses

  • Global uncertainty

  • Storage and perishability (for physical delivery)

4 Jul 2025 | 21:38
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