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Apart from equity, the Indian financial market offers a variety of alternatives to investing, diversifying, and maintaining a good portfolio. Commodity trading is one such approach. The first commodity market in India was established in 1875 under the Bombay cotton trade association. In 2003, India’s commodity market started to trade all commodities legally. The commodity market in India and the international commodity market have a unique role in boosting a country’s economy. It also allows investors to earn long-term profits because every country relies on raw materials to flourish.
Commodity Markets
A commodity market is a trading place where items are bought, sold, and traded. A commodity market in India is utilised as a price discovery method for trading several goods in the financial market. It is frequently used by manufacturers, wholesale merchants, and producers for physical or online commodity trading.
Investing in a commodity market is an excellent method to diversify an individual’s equity portfolio. It is because commodities and stocks have an inverse relationship. When stock markets collapse, commodity prices rise, and vice versa. As a result, commodity trading aids in the management of stock market risks. For example, gold, crude oil, and copper are commodities with huge trade volumes.
The Indian commodity trading market is a digital platform for buying and selling commodities. India’s three major commodity trading marketplaces are:
- MCX – MCX stands for Multi Commodity Exchange of India. It was established in November 2003 and traded commodities like bullion, energy, agricultural products and metals.
- NCDEX – NCDEX stands for National Commodities and Derivatives Exchange Limited. It was established in December 2003 and trades mostly agriculture commodities like pulses, cereals, oilseeds, spices, fibres, etc.
- ICEX – ICEX stands for Indian Commodity Exchange Limited. It was established in August 2017. It primarily deals with agro and diamond commodities.
Speculators and hedgers mainly dominate the commodity market. Hence, these two participants play an essential role in bearish and bullish trends in India.
Hedging
Commodity dealers, producers, and end-users utilise hedging to protect themselves from unfavourable price fluctuations. A Hedger aims to reduce risks without making profits. In the international commodity market, hedging avoids or at least limits potential losses. The futures exchange is a popular way to protect against price fluctuations. Participants in the market buy derivatives on the exchange to protect themselves against price fluctuations.
Speculating
These traders speculate on the price of a commodity. Speculators trade in a commodity market to create short-term profits. They are not exposed to any risks that require hedging. For example, an individual believes that rice prices will rise in the coming months. As a result, he purchases a rice futures contract and then sells it when the price rises. He generates a profit without taking any long-term positions or making any actual deliveries.
Bear and Bull market trends
Consumer confidence has a significant impact on the international commodity market. As a result, bear and bull markets are two investment terms used to describe commodity market performance in terms of stock prices.
- Bull market – Investor confidence soars during bull markets when stock prices climb for extended periods. As a result, investors tend to buy or hold stocks, owing to the booming economies and low unemployment that typically accompany bull markets.
- Bear market – Bear markets, on the other hand, are propelled by pessimism. Bear markets occur when stock prices keep declining for an extended period. Such markets are more likely to develop during economic downfall and rising unemployment. However, they are very different in terms of the influence they can have on your portfolio and investment decisions. Bear and bull markets lead to fluctuations in commodity market prices as well.
Blue chips
The phrase ‘blue chip’ has evolved through time to differentiate high-priced stocks from high-quality ones. These two ideas frequently collide, as investors are willing to pay a premium for high-quality stocks. A blue chip is considered a well-known, well-established, and financially sound organisation.
Blue chips are highly valued and of low volatility in a commodity market. These are companies that sell high-quality, well-known goods and services. They are noted for withstanding economic downturns and operating financially in the face of adversity. It contributes to their long track record of consistent and sustainable growth.
Conclusion
A commodity market is a place where you can trade raw materials and other primary products. Two types of commodities exist in the market. One of them is hard commodities such as natural resources, and the second is soft commodities like agricultural products. The international commodity market plays an essential role in a country’s economic and agricultural sector growth. Both MCX and NCDEX are online commodity exchanges that allow trading commodities like metals, agricultural products, and energy items.
