What are Commodities?
Commodities are a different asset class; unlike stocks and bonds, these are physical assets generally extracted from the earth. Commodities are produced in large quantities by different suppliers.
Examples of commodities include agricultural products like corn and wheat, energy sources like gas and oil, precious metals such as silver and gold, and industrial metals like copper. These raw materials are essential inputs for manufacturing processes across various industries.
Commodities Explained
Commodities are fundamentals of any economy. They are used as raw materials for manufacturing and essential goods for consumption. Unlike consumer products, which often vary in quality and features, commodities are standardized products with minimal differentiation between producers. Examples include agricultural products (Wheat), energy sources (oil and natural gas), and precious metals (gold).
Traditionally, commodities were physical substances, but the concept has expanded to encompass financial instruments like currencies and indices. These can be traded on specialized exchanges, and derivative contracts (futures, options) allow investors to speculate on price movements.
Due to their short correlation with other asset classes, commodities are often considered for portfolio diversification. They can also serve as a fence against inflation, as their prices tend to rise when the purchasing power of currency declines.
How Commodities are traded in India?
Commodity trading in India primarily occurs through the spot and futures markets. The spot market involves the physical delivery of commodities, limiting participation due to logistical challenges. In contrast, the futures market, dominated by the MCX (Multi Commodity Exchange of India), offers trading in contracts for future delivery. This market is more accessible and allows for risk management through hedging. Key commodities traded include metals like gold and silver, energy products like crude oil, and agricultural goods like wheat and cotton. Successful commodity trading requires a Demat account, a broker, market research, and a solid understanding of risk management strategies.