Sharekhan Blog

What is the Commodity Market in India?

  • Mar 9, 2024

If this is the case, you are not alone. Because of its complexity and use of technical jargon, the commodities market is frequently misunderstood. Nevertheless, it is a vital component of our economy and presents excellent investment prospects. So, let's discuss all about the commodity market in detail.

Commodity Market Meaning

Commodities such as energy, natural gas, spices, precious metals, and crude oil are traded in commodity markets. Commodities provide an alternative to traditional investing opportunities for investors looking to diversify their portfolios. In an economy, this lowers risk and guards against price increases.

Benefits of Investing in the Indian Commodity Market

Below are some of the benefits of the indian commodity market:

1.    Diversification

Investment portfolio diversity can be achieved by investing in commodities. This implies that you can lower your risk of loss while investing in various commodities rather than just one kind of asset.

2.    Protect yourself from inflation.

Purchasing commodities is a common way to protect yourself against inflation. Accordingly, as inflation rises, commodity prices rise as well, giving investors protection from inflation's consequences.

3.    Offers Great returns

If investors make the proper choices, the commodity market can provide them with great returns. As was previously noted, commodity prices are extremely erratic and subject to sudden fluctuations, giving investors the chance to buy low and sell high.

4.    Simple accessibility

Commodity trading India investors may readily access the commodity market, in contrast to other markets like the stock or real estate markets. Anyone with an internet connection may now easily invest in commodities from anywhere in the world thanks to online trading platforms.

Types of Commodities in Market

There are mainly two types of commodities: hard and soft commodities.

1.    Hard Commodities

Natural resources that are mined or harvested are the components of hard commodities. There are two categories into which the hard commodities are divided:

  • Metals: copper, zinc, silver, gold, and platinum
  • Energy: fuel, heating oil, natural gas, and crude oil

2.    Soft commodities

Commodities that are cultivated and nurtured as opposed to extracted or mined are referred to as soft commodities. Two categories are used to group the soft commodities:

  • Field crops: rice, corn, wheat, cotton, soybeans, coffee, salt, and sugar
  • Meat and livestock: Egg, Live Cattle, and Feeder Cattle

Number of Exchanges in the Stock Market of India

The Forward Markets Commission established twenty-two distinct commodity exchanges operating in India. In India, there are four most used Indian commodity exchange for trading:

  • ICEX, or the Indian Commodity Exchange
  • The Indian National Multi Commodity Exchange (NMCE)
  • India's Multi Commodity Exchange (MCX)
  • The NCDEX, or National Commodity and Derivative Exchange

How Does a Commodity Market Work?

Let's say you purchased a 100 gm gold futures contract on MCX for ?72,000. On MCX, gold has a 3.5% margin. Thus, the price you will pay for your gold is ?2,520. Let's say that the price of gold rises to ?73,000 per 100 grams the next day. The bank account you have connected to the commodities market will be credited with ?1,000. Let us assume that it falls to ?72,500 the following day. Your bank account will be debited by ?500 as a result.

Factors Affecting Commodity Prices

A number of factors influence the market's pricing for commodities. Among them are a few of them:

  1. Weather: The production of some commodities can be significantly impacted by natural disasters, including hurricanes, floods, and droughts. For instance, a drought may cause crop yields to decline and wheat prices to rise.
  2. Economic factors: A nation's economic standing has an impact on commodity pricing. Commodity prices rise when the economy is expanding, and consumer demand is strong.
  3. Political events: Price oscillations for commodities occur as a result of military conflicts or changes in government regulations. As an illustrated example, a government decision to increase taxes on oil extraction could be followed by fuel prices growing.
  4. Exchange rates of currencies: The rigidity of both exports and imports affects the prices of commodities. Commodity prices tend to go up being a consequence of increased export costs that are caused by a weak currency.

The Bottom Line

Let's hope that the given guide has aided you in mastering the commodity market fundamentals. It is normal to make some financial decisions after completing a lot of analysis and consulting an expert. It is important to remember that in the commodities market, which is the basis of our investment, information is the key point.

Team Sharekhan
by Team Sharekhan

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