How to trade on commodity spot prices

Last Updated: 16 Aug 2023

Among numerous ways investors can trade and earn profits, commodity trading is one of the most sophisticated and sought-after ways. Commodity trading is a way for investors to buy and sell commodities related to metals, agriculture, energy, and livestock. In India, commodities exchanges such as National Commodity & Derivatives Exchange Limited (NCDEX), Multi Commodity Exchange of India Limited (MCX), etc., permit and monitor trade in commodities such as gold, silver, pulses, sugar, copper, aluminum, etc.

Methods of commodity trading

Futures Contract: This allows investors to buy or sell a specific commodity at a set price and specific time in the future. Every futures contract has an expiry date, and it is at this time, the investor receives the underlying commodity.

Commodity Spot Price: Investors use spot prices to trade in futures to purchase, pay, and receive their delivery immediately, rather than waiting for them to expire.

Trading commodity spot price: This is preferred by investors who want to trade in futures but want to buy and sell them using a process similar to equities.

What is Spot Price?

A spot price is the current cost of any commodity for purchase, payment, and delivery. The commodity can be any listed commodity on exchanges licensed by the Securities and Exchange Board of India (SEBI). Using commodity spot prices, the investor is required to pay for the commodity immediately, based on the current market price. As the deal is done on the spot, hence the term ‘Spot Price.’

How are spot prices determined?

Just like most assets, the spot price of commodities is determined by the demand and supply system. The fluctuation in the prices is regulated by the current demand of the commodity and the subsequent supply of the goods that are being traded on the exchanges. For example, if the demand for a particular commodity rises due to an influencing factor, with the supply being the same, the spot price of the commodity might go up. It can go down if the supply rises, with the demand lowering or being the same.

How to trade on commodity spot prices?

IIFL is one of the leading players in the broking space in India and offers broking services in various categories of equity, commodities, currency, derivatives, etc. Trader Terminal, the proprietary trading terminal of IIFL, offers the convenience of trading in commodities by providing flexibility of access through desktop applications as well as a browser-based web application. You can trade commodity spot prices through the following process:

• Open a commodity trading account with IIFL through the mobile app or IIFL’s website.
• Choose an exchange and the asset with the commodity market you want to trade.
• You can trade commodity spot prices and start investing using the trading account.

Now that you know how to trade on commodity spot prices, you can start investing through IIFL’s trading platform. It is always advisable that you analyze the risk factors associated with commodity trading before you start investing.

Frequently Asked Questions

What are the four different types of commodities that can be traded?

You can trade in mainly four types of commodities: Metals, Agriculture, Energy and Livestock. These four types include numerous tradable commodities within them.

How does commodity pricing work?

Commodity pricing works on the principle of demand and supply. The price is determined by the buyers and selling where the buyers are willing to pay the sellers’ price.