What is the Commodities market and how Indians can invest in it?

What is the Commodities market and how Indians can invest in it?

Commodity trading refers to the sale and purchase of minerals, basic materials, agricultural goods, fuel, and other such items. In certain nations, this sector also involves livestock and meat sales.

Commodities are a collection of items that are essential to the smooth operation of our everyday life.

It is transferable in essence, or stuff that can be purchased and sold in simplistic words. Investment in commodities or exchanging commodities differs significantly from dealing with other forms of assets.

The government stepped into this market over time, eventually gaining control of the commodity market. The Securities and Exchange Board of India (SEBI) is the market authority in this area at the moment.

This article would be useful if you’ve never traded in the Indian commodities market and are planning to get into it

Commodity categories

Read about the different types of commodities that may be traded before you start commodity trading.

The following are some examples of popular categories:

  • Agricultural produce like wheat, corn or maize, etc.
  • Metals like gold, aluminium and copper, etc.
  • Energy like petroleum, natural gas etc.

    Characteristics of the commodities market

    Every market is different and has a few distinguishing features.
    Price- Demand and supply affect the value of the product. A commodity’s price rises when demand is high and supply is low, and vice – versa.
    Seasonal fluctuations – Seasonality affects commodity pricing as well. Crude prices, for instance, rise during the summertime because more people travel for holidays. Maize prices, on the other hand, plummet in Late September once the entire yield has been reaped.
    Legislation and policy – Public policies affecting a commodity can increase or decrease its worth. This is among the most crucial aspects of every commodities market.

    Ways to invest in the commodities market

  • Invest in ETFs

  • ETFs can also be used to invest in commodities markets. An ETF is a type of investment that tracks the performance of a commodity, industry, indexes, or other assets.

    An ETF may be bought or sold on any stock market in the same way that a normal stock can.

    Your ETF can be customised or structured to follow a single commodity or a broad variety of assets.

  • Invest in Options
  • Commodity options are yet another commodities investing alternative.

    Traders also trade top commodities via options trading, which gives them the choice but not the responsibility to purchase or sell the primary commodity at a specified price on a future expiration date.

    The strike price is the fixed price at which a trader can purchase or sell a commodity in the future.

    There are two kinds of options:

  • Call options provide the trader with the opportunity, but not the commitment, to purchase the base commodity at a certain cost at a future time.
  • Put options offer the investors the right, but not the commitment, to sell the base commodity at a predetermined value at a later time.

    To put it another way, If you believe the price of a commodity will climb, you should purchase a call option; if you believe the value of a commodity will decrease, you should purchase a put option.

  • Invest in physical commodities directly
  • You can make investments in a physical product by acquiring precise amounts at a fixed price and reselling it at a better price later, therefore achieving the purported goal of profit.

  • Invest in Futures contract
  • A commodities futures contract is an agreement to purchase or sell a base commodity at a predetermined value on or before a date in the future.
    In India, commodity futures are available for a wide range of commodities.

    Commodity futures are commonly used by market participants to limit the risk of price fluctuations throughout the production process before the product is available for delivery.

  • Invest in Commodity companies via equities:
  • If you don’t want to buy commodities directly, you can invest in stocks of corporations that consume or produce commodities, such as petroleum and steelmakers.

    Must follow in the commodities market

    Securities and equities are less turbulent than commodities. This extreme volatility, on the other hand, gives plenty of opportunities for traders to profit from market fluctuations.

    You must recognise the distinction between commodities markets and other types of exchanges.

    We can now move on to understanding the strategies and tactics that a novice in commodity trading should be aware of to succeed in the commodities markets:

  • Diversification

  • You must be disciplined enough to realise that errors will inevitably occur despite multiple forecasts, detailed analysis, and technological study.

    A successful trader, on the other hand, predicts declines and diversifies his portfolio among multiple commodities, such that losses in one group of commodities are balanced by profits in another set of products.

    The variables that affect the value of one commodity may vary considerably from those that influence the value of the other.

    As a result, it’s critical not to put all your eggs in one basket when it comes to generating money in the commodities market.

  • Control the level of volatility

  • When it comes to commodity trading, the word “volatility” is one that you will hear and identify with frequently.

    Commodity volatility is unrivalled and unrelenting. It’s like a storm that can sweep out all of your gains, but if properly cashed in, could result in huge returns.

    So, if you’re trading commodities, you should be aware that various commodities have varying volatilities.

    You must determine each commodity’s price range and trade appropriately.
    Lot sizes must be determined based on the magnitude of the volatility, not on margin needs.

    New traders should invest more in commodities with moderate volatility, such as gold and petroleum, and less in commodities with extreme volatility, such as aluminium and agri goods.

  • Choose a suitable exchange
  • You should choose an exchange with plenty of liquidity so that commodity futures may be readily purchased and sold without having to worry about finding a buyer or seller.

    In addition, the exchange’s clearinghouse serves as a middleman to both parties engaged in the transaction. This removes the possibility of a credit default.

    Furthermore, the risk is lessened since all major exchanges require commodities futures contracts to be marked to market on a regular schedule. As a result, picking a suitable exchange eliminates any liability exposure.


    Before learning how to trade commodities, you must first establish clear investment objectives and conduct a thorough study or seek the assistance of financial advisors.

    Commodity trading offers huge returns, but it also comes with a high level of risk.

    To begin commodities trading in India, one needs to research extensively and be well equipped. Through dedication and study, one may eventually become an expert in commodities trading.

  • CA Mukesh Gupta
    CA Mukesh Gupta
    Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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