Introduction to Commodities Stock Market
Yes, the obvious answer is either a supermarket or a grocery store.
But If I tell you that, there exists a stock market of these commodities where the commodities are traded like shares, will you believe my sentence? You may wonder about this, but you don’t have any other option than to believe my sentence as this is an absolute truth. And the market where these commodities are traded is called as Commodities Stock Market.
Let’s understand more about this market.
Meaning of Commodities stock market
You must have got a little grip on the meaning of the commodities stock market. Yes, it is a physical or a virtual place where buying, selling, and trading raw or primary products takes place. Commodities stock market is the same as the equity market the only difference is that instead of buying or selling of shares, commodities are traded here. For investors’ purposes, there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.
Now you may think that how old these commodities market trends are?… As per the records they have been traced back to the 17th century when rice futures were traded in Japan.
So throughout this article, you are reading the word commodities, commodities, and commodities. You must be wondering, what exactly comes in the category of commodities.
These commodities can be majorly classified into the following:
- Precious Metals: Gold, Silver, Platinum, etc.
- Other Metals: Nickel, Aluminum, Copper, etc.
- Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
- Soft Commodities: Coffee, Cocoa, Sugar, etc.
- Live-Stock: Live Cattle, Pork Bellies, etc.
- Energy: Crude Oil, Natural Gas, Gasoline, etc.
Let’s look at the different segments of the commodities stock market.
There are two major segments of the commodities stock market. They are the over-the-counter (OTC) market and Exchange-traded market. Les understand each one of them now
Characteristics of Over-The-Counter (OTC) Market
Over Counter or most commonly called OTC market is the one which has no formal structure of trading and the trading between the parties is done on bilateral understanding.
As this market lacks formal structure, it is also referred to as Customized Market. In terms of commodity trading, OTC represents the spot trading of commodities. The trades which take place in these markets are delivery based and as it is unregulated there can be a counter-party risk in terms of disclosure of information between the parties.
Characteristics of Exchange-Traded market
This market is also known as the derivatives market. And in this marketplace commodities are traded over the exchange. It is a standardized and regulated market. Thus exchange acts as an intermediary to all commodity transactions and takes initial margin from both sides of the trade to act as a guarantee.
Why there is a need for the exchange-traded commodity derivatives market?
- With an Exchange-based platform, the reach becomes wider which off-course leads to greater participation.
- Also for the small participants like wholesaler doesn’t have to depend upon the local demand and supply chain as through exchange he gets a large no of participants associated with demand and supply function.
- Another advantage is to the other participants like speculators, arbitragers who can study the price patterns through various commodity market analysis software’s like technical analysis and deal in the most efficient price.
Determinant factors of commodity prices
This market is highly volatile and there are different factors that affect the commodity prices. Some of these factors are discussed below:
- Demand And Supply: It’s a well-known fact that when demand for a commodity is higher than the supply, its price increases, and vice versa. There always exists some kind of imbalance between the two when it comes to commodities, which results in constantly fluctuating prices.
- Weather conditions: As we know the majority of commodities traded in the world markets are agricultural goods, and the production of these goods depends on the weather conditions. If sudden changes in climatic conditions happen like inadequate rainfall or droughts, might affect the availability of agricultural goods in the world market, causing scarcity and pushing commodities market trends upwards.
- Economic and political conditions: This is also another major factor as the prices of commodities are influenced by the economic and political conditions of the countries that are producing and consuming them.
Government policies also influence the commodities market prices, for e.g, If the Indian government increases import duty on oil, then the price will increase proportionately.
There are other factors like inflation, seasonal variations, currency movements, etc. which are majorly responsible for price fluctuations in the commodities market trends
Participants in the commodities market trends
These market participants are divided into hedgers, speculators, and arbitrageurs.
Hedging in simple language means the reduction of risk. Consequently, any investor who is looking at reducing his risk is known as Hedger. In the market, hedgers take the position that is opposite to the risk he is otherwise exposed to. For e.g.A Corn farmer will hedge by selling corn futures since it is exposed to the risk of falling corn prices.
These are the investors who speculate on the direction of the futures prices for making a profit. They hypothesize expected price movements and take positions accordingly. Thus trading in a commodity futures market is an investment option.
They are the traders who attempt to profit from, pricing inefficiencies in the commodities stock market. Arbitrage in a way involves simultaneously the sale and purchase of the same commodities in different markets. Usually, such transactions are risk-free.
Wondering how the commodities stock market work?
Major Commodity Exchanges
Let’s now look at the world’s major commodity exchanges
Chicago Board of Trading or known as CBOT
This was the first commodities stock market exchange established in the world in the year 1848. It is one of the leading exchanges in the world for trading in the future and options. In the beginning, CBOT dealt with agricultural commodities. Futures contracts in CBOT evolved over a period of time to facilitate trading in non-storable agricultural commodities and nonagricultural products like Gold and Silver.
New York Mercantile Exchange known as NYMEX
It is the world’s biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious and metals. The commodities stock market exchange has been in existence for 132 years and performs trades through two divisions – The NYMEX division which deals in energy and Platinum and the COMEX division which deals in all other metals.
London Metal Exchange is known as LME
The primary focus of LME is in providing a market for participants from the non-ferrous base metals, related industry to safeguard against risk due to movement in base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a day. And future contracts run on a daily basis for a period of three months, unlike other commodities market trends that are primarily based on monthly prompt dates.
What is the history of commodities stock markets in India?
Being an agricultural country India has a long history of commodities stock market trading. Right from the years when India was ruled by foreign countries, it had a thriving futures market for commodities such as gold, silver, cotton, edible oils, etc. But later in the mid-1960s, due to natural calamities like droughts and scarcity and government policies futures trading in most commodities was banned. However, in recent years Commodities stock market trading was restarted. In some cases futures markets are localized for specific commodities like for example, Kerala being the spice city has an exchange for Pepper, Mumbai the economical capital is a center for gold and so on.
In general, India has six national commodity exchanges namely:
- Multi Commodity Exchange (MCX), located at Mumbai
- National Commodity and Derivatives Exchange (NCDEX), located at Mumbai
- National Multi-Commodity Exchange (NMCE) located at Ahmedabad.
- Indian Commodity Exchange (ICEX), located at Mumbai
- The ACE Derivatives exchange ( ACE ) is located at Mumbai
- The Universal commodity exchange (UCX) is located at Navi Mumbai.
Recent Developments in the commodities stock market
The way shares are traded in the stock market, the Indian government has also allowed, national stock exchanges like the Multi Commodity Exchange (MCX) to come forward and deal the commodity derivatives in an electronic format.
With these exchanges, trading is carried out on an order-driven and screen-based trading system. These exchanges are regulated by the Forward Markets Commission (FMC).
Commodities stock Market, Infographic
Learn the juice of this article in just a single minute, Commodities stock Market.
This has been a guide on the commodities stock market. Here we have discussed the Basic Concept and the characteristics of the commodities stock market. You may also look at the following articles to learn more –