Commodity Trading

Commodities trading is a sophisticated form of investing. It is similar to stock trading but instead of buying and selling shares of companies, an investor buys and sells commodities. Like stocks, commodities are traded on exchanges where buyers and sellers can work together to either get the products they need or to make a profit from the fluctuating prices.

Commodity exchange

commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.)

Commodity market

Commodity market Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.

Commodities traded in Indian exchange

1. Multi Commodity Exchange (MCX)
2.  National Commodity and Derivatives Exchange (NCDEX)
3. National Multi-Commodity Exchange (NMCE)
4.  Indian Commodity Exchange (ICEX).

Apart from this India have numerous regional exchanges. Forward Markets Commission (FMC), which was set-up in 1953.

Global commodity exchange markets

1. New York Mercantile Exchange
2. Tokyo Commodity Exchange
3. NYSE Euronext
4. Chicago Board of Trade (CBOT)
5. Multi Commodity Exchange

Benefits

1.  Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account.
2.  Commission Costs- It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument
3.  Ability to go short- Futures contracts can be sold as easily as they are bought enabling a speculator to profit from falling markets as well as rising ones.
4. There is no 'upstick rule' for example like there is with stocks.
5. No 'Time Decay'. Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at expiry.

Disadvantages

Disadvantages Speed of trading. Traditionally commodities are pit traded and in order to trade a speculator would need to contact a broker by telephone to place the order who then transmits that order to the pit to be executed. Once the trade is filled the pit trader informs the broker who then informs his client. This can take some take and the risk of slippage occurring can be high. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange.

Commodity trading is like a tool, which promises and give guarantee to buyer/seller to get their appropriate product without any loss with fixed contracts within a delivery period plus it will protect the seller from price drops and buyer from price rises in future. But some time low margin requirements can encourage create poor money management