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What is Commodity market and how does it works?

Author: Nayna Bhardwaj
by Nayna Bhardwaj
Posted: Apr 26, 2017

A market that trades primarily in the economic sector rather than manufactured products is known as the commodity market. It facilitates trading in various commodities. The market changes very rapidly and in order to earn the profit on your investments, investors and traders take commodity tips before investing in the market.

We can also say that in commodity market buyers and sellers can trade any homogenous good in bulk. Grain, precious metals, electricity, oil, beef, orange juice and natural gas are traditional examples of commodities, but foreign currencies, bandwidth, and certain financial instruments are also part of today's commodity markets.

In other words, commodity market can be commodity market is a physical or virtual marketplace for buying, selling and trading raw or primary products.

Commodities are divided into two types:

  1. Hard commodities
  2. Soft commodities

Hard commodities are basically natural resources which are mined or extracted like gold, and oil.

Soft commodities are the agricultural products like corn, wheat, coffee, sugar, and pork.

A commodity market may be a spot or a derivatives market. In the spot market, commodities are bought and sold for immediate delivery only. Whereas, in the derivatives market, various financial instruments based on commodities are traded. Currently, there are about 50 major commodity markets worldwide which facilitate investment trade in approximately 100 primary commodities.

Futures contracts are very oldest way of investing in commodities. Futures are secured by physical assets. Futures can be explained as the exchange traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price.

Who Regulates Commodity markets?

SEBI regulates Commodity Derivative Markets Since September 2015. Before this the Forward Market commission, Overseen by Ministry of Consumer Affairs regulated Commodities.

What are the trading hours?

The trade timings of the Exchange from Monday to Friday are IST 10:00 a.m to 11.30 p.m. / 11.55 p.m.* (*during US daylight saving period).

How does it work?

A commodity can be traded by buyers and sellers either in the spot market, it is also called as cash market. In this, the buyer and seller immediately complete their transaction based on current prices, or in the futures market.

Commodities futures trading is regulated by the Commodity Futures Trading Commission (CFTC) through its enforcement of the Commodity Exchange Act of 1974 and the Commodity Futures Modernization Act of 2000.

Commodities exchanges do not set the prices of the traded commodities. Rather, the supply and demand determine commodities prices. We can say that commodity is a raw material which is virtually used by everyone. The apple juice you take in your breakfast, the gas in your car, the chicken on your dinner plate and the cotton in your shirt all somehow interact with a commodities exchange at one point.

Commodities-exchange prices set or at least influence the prices of many goods used by companies and individuals around the globe. The whole segment of the economy can affect the change in the commodity price. Commodities are mainly traded electronically; however, several U.S. exchanges still use the open outcry method.

About the Author

I am interested in financial market so I wrote my article on the commodity market. The market is very interesting and once you understand how it works you'll like it too.

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Author: Nayna Bhardwaj

Nayna Bhardwaj

Member since: Apr 19, 2017
Published articles: 31

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