What is Commodity Trading : Commodities trading are a sophisticated form of investing. It is similar to stock trading but instead of buying and selling shares of companies, an investor buys and sells commodities. Like stocks, commodities are traded on exchanges where buyers and sellers can work together to either get the products they need or to make a profit from the fluctuating prices. To completely understand the commodity trading we need to describe two more terms which are similar to each other. a.) Commodity exchange b.) Commodity market Commodity exchange: A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) Commodity market: Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.
Commodities traded in Indian exchange. : Today India has four national commodity exchanges namely: 1.) Multi Commodity Exchange (MCX) 2.) National Commodity and Derivatives Exchange (NCDEX) 3.) National Multi-Commodity Exchange (NMCE) 4.) Indian Commodity Exchange (ICEX) Apart from this India has numerous regional exchanges Batinda Om & Oil Exchange Ltd. (BOOE) + 20 other Regional Exchange All these Commodity exchange overseen by Forward Markets Commission (FMC) which was set-up in 1953. Global commodity trading markets: There are many global commodity trading markets available across the world. The modern commodity markets have their roots in trading of agricultural products. Trading of commodities consists of: 1.) Physical trading 2.) Derivatives trading Physical trading deals with trading of physical product like Gold, Cotton, Crude oil etc. Derivatives trading deals with trading of derivatives products like gas and power derivatives, weather derivatives, environment derivatives etc.
Commodity market : Exchange traded commodities markets: (Standardized contract size and maturity dates) mainly trades Metals, Agricultural, Energy, Bullion etc. OTC commodities markets: (Individually tailored contracts) mainly trades Precious metals, Energy, Agricultural based on Spot market * OTC (Over the counter) Different types of standard contract: Different types of standard contract Spot price: Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Forward contract: A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price. Future contract and future option: A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Some facts based on IFSL Research 2008(International Financial Services London : Some facts based on IFSL Research 2008(International Financial Services London Largest commodity exchanges Worldwide, there are around 50 major commodity exchanges that trade in more than 90 commodities. ‘Soft commodities’ are traded around the world and dominate exchange trading in Asia and Latin America. Metals are predominantly traded in London, New York, Chicago and Shanghai. Energy contracts are mainly traded in New York, London, Tokyo and the Middle East. More recently a number of energy exchanges have emerged in several European countries. List of Top 5 global commodity exchange markets : List of Top 5 global commodity exchange markets New York Mercantile Exchange Tokyo Commodity Exchange NYSE Euronext Dalian Commodity Exchange Multi Commodity Exchange Advantage and Disadvantage of Commodity trading: Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account. Commission Costs. It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument. For example, one full size S&P500 contract is currently worth in excess off $250,000 and could be bought/sold for as little as $20. The expense of buying/selling $250,000 could be $2,500+. Ability to go short. Futures contracts can be sold as easily as they are bought enabling a speculator to profit from falling markets as well as rising ones. There is no 'upstick rule' for example like there is with stocks. No 'Time Decay'. Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at expiry.
Disadvantages : Disadvantages Speed of trading. Traditionally commodities are pit traded and in order to trade a speculator would need to contact a broker by telephone to place the order who then transmits that order to the pit to be executed. Once the trade is filled the pit trader informs the broker who then then informs his client. This can take some take and the risk of slippage occurring can be high. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange. Leverage. Can be a double edged sword. Low margin requirements can encourage poor money management, leading to excessive risk taking. Not only are profits enhanced but so are losses. Most futures contracts are not deliverable and are cash settled at expiry Conclusion: Conclusion: In my opinion Commodity trading is like a tool which promises and give guarantee to buyer/seller to get their appropriate product without any loss with fixed contracts within a delivery period plus it will protect the seller from price drops and buyer from price rises in future. But some time low margin requirements can encourage create poor money management