A commodity is a primary or basic good used to make the final goods and is interchangeable in commerce. Grain, gold, silver, oil, and natural gas are all examples of commodities. Commodities in forex can be an essential tool for investors to diversify their portfolios. When commodities are traded on an exchange, they must also meet specified minimum standards, also known as a basis grade.
Types of Commodities
There are different types of commodities available for trading. These are categorized into the following classes based on their nature:
Hard Commodities
- Precious metals – Gold, platinum, copper, silver, etc.
- Energy – Crude oil, Natural gas, gasoline, etc.
Soft Commodities
- Agriculture – Soybeans, wheat, rice, coffee, corn, sugarcane, etc.
- Livestock and Meat – Live cattle, feeder cattle, etc.
The most common trade in the major commodity exchanges in India includes crude oil and silver. While crude oil is one of the most important energy sources required for virtually every industry, silver is one of the most precious metals besides gold.
Buyers and Producers of Commodities
The futures contracts on exchanges carry out the sale and purchase of commodities in Forex. They further standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade (CBOT) stipulates that one corn contract is for 5,000 bushels and states what grades of corn can be used to satisfy the contract.
There are two types of traders trading commodity futures. The first are buyers and producers of commodities who use the commodity futures contracts for hedging purposes. These traders make or take delivery of the actual commodity.
For example, the wheat farmer who plants a crop may think of the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and have a guaranteed and predetermined price for the wheat when it is harvested.
Commodities Speculators
The second type of commodities trader is the speculator. These are traders who trade in the commodities markets to profit from the volatile price movements. These traders never make or take delivery of the actual commodity when the futures contract expires.
Futures markets are very liquid and have a high degree of daily range and volatility. It makes them very tempting markets for the traders. Many index futures are used by brokerages and portfolio managers to offset risk. Since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio.
Rise in demand for Commodities
The rise in commodity prices and demand happens when inflation accelerates. This is the reason why investors often flock to them for their protection during times of increasing inflation. The prices of goods and services then go up to match the increase. This causes commodities to often serve as a hedge against a currency’s decreased buying power when the inflation rate increases.
Difference Between Commodity and Product
A commodity in forex is a raw material used in the production process to produce finished goods, while a product is a finished product sold to consumers. No value is added to a commodity, which can be grown or mined. Commodities are typically in the early stages of production, while products fall at the final stage.
What is Commodity Market?
A commodity market is a type of marketplace that lets an individual engage in buying, selling, and trading raw materials or even primary products.
A commodity market facilitates an exchange of physical goods among residents in a country. Individuals can undertake investments in both perishable and non-perishable products.
How to Trade Commodities?
1. Get Familiar with the Commodity Trading Exchange
The very first step for a trader to start commodity trading is to get familiar with all the exchanges that which commodities are traded.
In India, commodities are traded through three major exchanges such as:
- National Multi Commodity Exchange of India (NMCE)
- National Commodity and Derivative Exchange (NCDEX)
- Multi Commodity Exchange of India (MCX)
2. Select a trustworthy and efficient broker
The next important step to start commodity trading is to select a reliable and most rated forex broker. Selecting an efficient stock broking company is challenging because you have to trust them with your account and trading manner. The brokers help the traders by informing them about commodity trading.
While selecting a broker, the trader must know about the brokerage fee they charge and types of fees like clearing fee, platform fee, commission and the major factor that a trader should consider while selecting a broker is the services they provide on their platform.
3. Open Commodity trading account
Once a trader has selected their reliable broking company to start commodity trading, they have to apply the next step by opening a demat account.
They have to fill out an application form and provide all the necessary details asked there. The broker then checks and analyzes the information provided by a trader. Depending on the investor’s credit, trading experience, and risk-taking capabilities, the company decides to agree or reject the opening of the Demat account.
4. Make an Initial Deposit
Once a trader has opened their commodity trading account, they have to make a small investment to start their trading.
However, they have to deposit the initial margin, which is generally equal to 5 to 10% based on the contract value.
Conclusion
In conclusion, Commodities are the basic goods used to make finished goods, which are further traded by the investors/traders in the commodity market for either profit or use. Commodities in Forex can be a way to diversify holdings, hedge against inflation, and realize a profit, but traders should have a high tolerance for risk if they choose this path. As with other high-risk, high-reward trading opportunities, be sure you know and understand the strategies behind trading commodities before you add these assets to your portfolio.