EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login
Home Finance Finance Resources Trading for dummies Commodities Stock Market
Secondary Sidebar
Finance Blog
  • Trading for dummies
    • Trading in Forex
    • Contango and Backwardation
    • Commodity Trading
    • How to Trade Options?
    • Dimsum Bond
    • Nostro Account
    • Temporal Method
    • Spot Market
    • Pink Sheets
    • Trading Floor
    • Pump and Dump
    • Market Maker?
    • Pre-Market Trading
    • Publicly Traded Companies?
    • Share Swap?
    • Risk Reward
    • S&P 500 PE Ratio
    • PE Ratio of Nifty
    • Sharpe Ratio
    • Bull Trap
    • Fundamental Analysis vs Technical Analysis
    • Ripple vs Bitcoin
    • Ripple vs Litecoin
    • Sell Side vs Buy Side
    • Gamma Function Formula
    • Bitcoin vs Blockchain
    • Bitcoin vs Litecoin
    • Call Option vs Put Option
    • European option vs American option
    • Futures vs Forward
    • Stop Loss Order
    • Hyperledger
    • Floating Stock
    • Option Adjusted Spread
    • Penny Stocks
    • Contango vs Backwardation
    • Investing vs Trading
    • Features Of Convertible Bonds
    • Confirmation Bias Example
    • Currency Trading
    • Indian Stock Market
    • Invest in Fundamentals
    • Futures Trading
    • Technical Analysis Indicator
    • Forex Trading
    • Commodity Trading
    • Forex Trading Strategies
    • Futures Fundamentals
    • Play the Stock Market Game
    • Binary Options Trading
    • Commodities Stock Market
    • Trading Tools
    • Mistakes to Avoid While Day Trading
    • Bitcoin vs Ethereum
    • Future vs Option
    • Option vs Warrant
    • Stock Market Trading
    • Proprietary Trading
    • Employee Stock Options
    • Litecoin vs Ethereum
    • Forex Trading For Beginners
    • Variance vs Covariance
    • Trading Securities
    • Stock Futures Trading
    • Above the Line vs Below the Line
    • Stock Market Chart Patterns
    • Swing Trading Strategies
    • Currency Exchange Market
    • Forex Brokers
  • Accounting fundamentals (700+)
  • Asset Management Tutorial (200+)
  • Banking (44+)
  • Corporate Finance Basics (373+)
  • Credit Research Fundamentals (6+)
  • Economics (88+)
  • Finance Formula (386+)
  • Financial Modeling in Excel (17+)
  • Investment Banking Basics (140+)
  • Investment Banking Careers (29+)
  • valuation basics (27+)
  • Insurance Resources (14+)
  • Top Finance Books (7+)
Finance Blog Courses
  • Online Cryptocurrency Certification
  • Online CFA Level 1 Training
  • Equity Research Training

Commodities Stock Market

By Jesal ShethnaJesal Shethna

Commodities Stock Market

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.

Picture3-1024x767

Let’s understand more about this market.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

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:

All in One Financial Analyst Bundle(250+ Courses, 40+ Projects)
Financial ModelingInvestment BankingUS GAAPCFA-Level 1 & 2
Equity ResearchM & A ModelingPrivate Equity ModelingForex Trading
Price
View Courses
250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (86,192 ratings)
  • 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.

Recommended courses

  • Online Corporate Finance Training
  • Complete Equity Valuation Training
  • Derivatives Market Online Course
  • IFRS Course

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.

Hedgers

Low-basis-hedging-image1.18385849_std-300x225

 

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.

Speculators

Speculator-240x300

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.

Arbitrageurs

Arbitrageurs

 

 

 

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:

  1. Multi Commodity Exchange (MCX), located at Mumbai
  2. National Commodity and Derivatives Exchange (NCDEX), located at Mumbai
  3. National Multi-Commodity Exchange (NMCE) located at Ahmedabad.
  4. Indian Commodity Exchange (ICEX), located at Mumbai
  5. The ACE Derivatives exchange ( ACE ) is located at Mumbai
  6. 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.

MCX-1024x475

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.

Recommended Articles:

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 –

  1. Stock Market Trading
  2. Options Trading Strategies
  3. Rural Market Products
  4. Forex Market
Popular Course in this category
All in One Financial Analyst Bundle- 250+ Courses, 40+ Projects
  250+ Online Courses |  1000+ Hours |  Verifiable Certificates |  Lifetime Access
4.9
Price

View Course

Related Courses

Cryptocurrency Training (9 Courses)4.9
CFA level 1 Course with Mock Tests & Solutions (20 Courses, 3+ Mock Tests with Solutions)4.8
Equity Research Training (17 Courses)4.7
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

ISO 10004:2018 & ISO 9001:2015 Certified

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Financial Modeling Course

3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more