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Commodities
A commodity market is a market where commodities are bought and sold. Commodities are goods or products that can be traded on any market in the world. Commodity markets exist for all sorts of raw materials, from wheat to steel to oil to coffee and other physical goods like gold, diamonds, other precious metals, silver, platinum, and other minerals.
The commodity market is the place where investors and traders buy and sell commodity assets.
Commodities can be divided into two types:
Raw commodities produced by nature include corn, wheat, sugar, crude oil, and natural gas. The delivery of raw commodities like corn, soybeans and orange juice is typically based on a physical unit such as bushels or tons.
Processed commodity products such as energy, metals, livestock and soft commodities like coffee and cocoa.
Commodities can be traded in either spot or futures markets. In the spot market, the buyer immediately pays for the commodity at the current spot price. In futures markets, buyers pay for a contract to receive the commodity in the future at an agreed-upon price. Processed products may also be traded in futures markets.
How does a commodity market work?
Suppose you bought a gold futures contract on MCX at Rs. 72,000 for every 100 gm. Gold’s margin is 3.5% on MCX. So you will be paying Rs. 2,520 for your gold. Suppose that the following day, the cost of gold increases to Rs. 73,000 per 100 gm. Rs 1,000 will be credited to the bank account you have linked to the commodity market. Assume that the day after, it drops to Rs. 72,500. Accordingly, Rs. 500 will be debited from your bank account.
Various intermediaries, such as speculators, hedgers, exchanges, and brokers, are involved in the smooth processing of commodity transactions while ensuring no violations of the rules and regulations.
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