Commodities are broadly classified into two main categories:
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.)
Soft Commodities
These are agricultural products or livestock, including:
Wheat
Coffee
Sugar
Cotton
Soybeans
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.
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.
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)
Like any financial market, commodity trading comes with risks:
High volatility
Leverage-related losses
Global uncertainty
Storage and perishability (for physical delivery)