Types of Commodities

The stock market is a preferable choice for most investors. However, there is a completely different asset class that knowledgeable investors prefer to trade and earn hefty profits: commodity trading . The trading process is based on the price fluctuations of commodities such as natural gas, pulses, aluminum, etc. Investors can trade different types of commodities in the market. This blog details the definition of commodities and how you can profit from commodity trading.

What are Commodities?

A commodity is an asset class or a group of assets that are most likely used by you in your everyday life, such as oil, metals, spices, pulses, etc. They can be mainly categorized as movable goods that anyone can purchase or sell, except for actionable claims or money.

What is a commodity market?

A commodity market is a place for investors to buy or sell different types of commodities and make a profit along the way. Typically, an investor places an order to buy a commodity to sell it in the future when the market price is higher than the purchase price.

Where to invest in commodities?

India has 22 commodity exchanges that were set up under the Forwards market commission. However, investors mainly prefer the following commodity exchanges for commodity trading:

  1. National Commodity and Derivatives Exchange – NCDEX
  2. Multi Commodity Exchange – MCX
  3. National Multi Commodity Exchange – NMC
  4. Ace Derivatives Exchange – ACE
  5. Indian Commodity Exchange – ICEX
  6. The Universal Commodity Exchange – UCX

Types of commodities

Although there are hundreds of commodities to trade at any of the exchanges; the most common types of commodities are as follows:

Commodity sectors Constituents
Agriculture Grains: Rice, Basmati rice, wheat, maize, jeera.
Oil and oilseeds: Castor seeds, soy seeds, castor oil, refined soy oil, soy meal, crude palm oil, groundnut oil, mustard seed, cottonseed, etc.
Spices: Pepper, red chili, jeera, turmeric, and cardamom.
Pulses: Chana, urad, yellow peas, tur dal.
Metals and materials Base metals: Aluminum, copper, nickel, zinc, tin.
Bulk commodities: Iron ore, coking coal, bauxite, steel.
Others: Soda ash, chemicals, rare earth metals.
Precious metals and materials Gold, silver, platinum, and palladium.
Energy Crude oil, natural gas, Brent crude, thermal coal, alternate energy.
Services Oil services, mining services, and others.

Different ways of commodity trading

There are two major ways through which commodity traders can trade:

  1. Futures Contract: A commodity futures contracts is an agreement between the buyer and the seller of the commodity. The buyers purchase a specific quantity of a commodity at a predetermined price. This contract remains until the price of the bought commodity has risen at the time of the expiry to make a profit.
  2. Options Contract: An options trading contract is generally permitted in top commodities wherein the trader has the right but not a legal obligation to buy/sell the commodity at a fixed price. Such a contract helps investors to make a profit based on price fluctuations without having to buy/sell commodities.

Participants of the commodity market

Investors who trade different types of commodities in the commodity markets are mainly classified into the following two types:

  • Hedgers: Hedgers are the producers, manufacturers, etc., of the commodity and generally enter into a futures contract to mitigate their risk exposure by entering into a futures contract. Simply put, hedgers ensure that they will get a pre-determined price for their commodities in the future and would not incur a loss if the prices go down at the time of selling.
  • Speculators: Speculators are actual traders that try to predict the future price of commodities based on various factors and monitor their prices regularly. If these speculators think that the price of a particular commodity will go up, they buy the commodity contract and sell it for a profit.

Features of the commodity market

  • Inverse Relation: The commodity market has an inverse relationship with the equities and bonds market. As the commodity prices rise, the prices of equities and bonds are more likely to fall.
  • Demand and supply: Market demand for commodities and their current supply heavily influences the prices of different types of commodities. A rising demand with limited supply can increase the prices, while a limited demand with higher supply can result in reduced commodity prices.
  • Diversification: Due to its inverse relation to other asset classes, commodities are featured products that ensure immense portfolio diversification. By commodity trading, investors can ensure a healthy portfolio even if other asset classes are consolidating or going through a correction.
  • Inflation Hedge: Commodities trading provides a great way to glide through rising inflation as the prices of top commodities such as gold, silver, crude oil, etc., tend to rise over time. It allows investors to multiply their wealth by ensuring the long-term multiplication of their corpus.
  • Margin Trading:Brokers, such as IIFL, that are included in commodities trading offer lower margins relative to stock and bonds, allowing both hedgers and speculators to profit more from the price fluctuations.

How do trade in different types of commodities?

For trading in commodities, you need to select a stockbroker to open a commodities trading account. IIFL is one of the leading players in the broking space in India and offers brokerage services in various categories of equity, commodities, currency, derivatives, etc. Trader Terminal, the proprietary trading platform by 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. You can do this through the mobile application or IIFL’s website.
  • Choose an exchange and the asset with the commodity market you want to trade.
  • You can start trading your preferred commodities contracts once your account is active.

Commodity trading can be a great way to diversify your portfolio and mitigate overall portfolio risk. Irrespective of you are a hedger or a speculator, you can utilize commodity trading as a way to provide financial protection. If you want further assistance in opening a commodity trading account, you can visit our website or download our application from Google Play Store.

Frequently Asked Questions Expand All

As there are thousands of commodities a hedger or a speculator can trade, to make it simpler, the commodities have been divided into three categories: Agriculture, energy and metals.

Some of the major commodities are gold, crude oil, cotton, sugar, natural gas, wheat, uranium, coffee and corn.

Your top five commodities should depend on your risk tolerance, commodity niche and your preferred market. However, you can consider trading in Crude oil, Coffee, Natural gas, Gold, Wheat, and Cotton.

Basic commodities are those commodities that are vital for people in their day to day operations. These can be natural gas, wheat, eggs, sugar, cattle etc.