Before we understand about commodity trading, please let us know what commodity means. A commodity is anything on the market to which a value can be assigned. It can be a market item such as food grains, metals, oil, which help meet the needs of supply and demand. The price of the basic product is subject to variations according to supply and demand. Now, let’s get back to what is commodity trading.
When commodities such as energy (crude oil, natural gas, gasoline), metals (gold, silver, platinum), and agricultural products (corn, wheat, rice, cocoa, coffee, cotton, and sugar) are traded for financial gain , then it is called commodity trading. These can be traded spot or as derivatives. Note: You can also trade livestock, such as cattle, as a raw material.
In a cash market, you buy and sell the commodities for instant delivery. However, in the derivatives market, commodities are traded on various financial principles, such as futures. These futures are traded on exchanges. So what is an exchange?
Exchange is a governing body that controls all commodity trading activities. They guarantee a smooth commercial activity between a buyer and a seller. They help create an agreement between the buyer and the seller in terms of future contracts. Examples of exchanges are: MCX, NCDEX and ECB. Wondering, what is a futures contract?
A futures contract is an agreement between a buyer and a seller of the commodity for a future date at today’s price. The futures contract is different from the forward contract, unlike the forward contracts; the futures are standardized and traded in accordance with the terms established by the Exchange. That is, the parties involved in the contracts do not decide the terms of the future contracts; but they only accept the terms regulated by the Exchange. So why invest in commodity trading? You invest because:
1. Commodity futures trading can generate big profits in a short period of time. One of the main reasons for this is the low deposit margin. You end up paying 5-10-20% of the total contract value, which is much lower compared to other forms of negotiation.
2. Regardless of the performance of the commodity you have invested in, it is easier to buy and sell them due to the good regulatory system formed by the exchange.
3. Hedging creates a platform for producers to hedge their positions based on their exposure to the commodity.
4. There is no risk to the company when it comes to commodity trading compared to the stock market. Because, commodity trading is all about supply and demand. When there is an increase in demand for a particular product, you get a higher price, in the same way, also the other way around. (can be based on the season for some commodities, for example agricultural products)
5. With the evolution of online trading, there is drastic growth in commodity trading, compared to the stock market.
The data involved in commodity trading is complex. In today’s commodity market, it’s about managing data that is accurate, up-to-date, and includes information that enables the buyer or seller to do business. There are many companies in the market that provide solutions for commodity data management. You can use software developed by one of these companies, for efficient data management and analysis to predict the future market.