In this article, we will discuss
- Commodity Trading: Types and Strategies
- What is Commodity Trading?
- What Are the Types of Commodities?
- What Are the Most Traded Commodities in the Market?
- What Are the Different Commodity Trading Strategies?
- Trading Strategies with the Help of Common Indices
Commodity Trading: Types and StrategiesIf you are a new entrant into the vast world of investments, remember that there are diverse opportunities that go beyond equities. Commodity trading is becoming an increasingly popular and lucrative investment option in India for the many benefits associated with it. To begin with, investment in commodities acts as a hedge against inflation, which is an important reason behind its rising popularity. But, not all investors have a clear idea about the types and strategies of commodity trading. So, in this blog, we’ll explore some of the crucial details about commodity trading.
What is Commodity Trading?First, let us quickly touch upon what commodities are. These are raw materials or standardised resources which carry intrinsic value. Commodities are important resources required to produce/manufacture refined goods. Commodity trading, on the other hand, can be defined as the buying/selling/trading of commodities. In India, it takes place through derivatives contracts, for example, commodity futures and options. These derivative contracts derive their value from their underlying commodities. The general norm is to carry out commodity trading in lots, for example, kilograms of wheat, barrels of oil and bushels of corn.
What Are the Types of Commodities?Before we delve into the types and examples of each commodity, it’s important to note something. Commodities can be broadly categorised into hard and soft commodities.
What Are the Most Traded Commodities in the Market?When we look at the global commodity market, we'll find that gold, silver, crude oil, and natural gas are some of the most traded commodities in India. Some of the widely traded commodities are listed below:
- Grains: Rice, wheat, maize, jeera, Basmati rice
- Pulses: Chana, yellow peas, tur dal, urad
- Oils and oilseeds: Soy seeds, castor seeds, soy meal, refined soy oil, crude pal, soy meal
- Spices: Red chilli, pepper, jeera, turmeric and cardamom
- Metals and materials
- Bulk commodities: Iron ore, bauxite, coking coal and steel
- Base metals: Aluminium, nickel, copper, tin, zinc
- Others: Chemicals, soda ash, rare earth metals
- Precious metals and materials
- Gold, silver, palladium and platinum
- Natural gas, crude oil, thermal coal, Brent crude, alternative energy
- Mining services, oil services and others
What Are the Different Commodity Trading Strategies?Often, traders end up using the following strategies while trading in commodities:
Call buy and call sell
Covered short put
Covered short call
Strangles and straddles
Trading Strategies with the Help of Common IndicesIf you’re a person who has just ventured into the world of investments, you can get exposed to commodities gradually with the help of common indices. Generally, these are cash-settled contracts, which are smaller to futures contracts in lot size.
ConclusionYou can consider commodity trading if you’re on the lookout for an investment option which would also act as a hedge against inflation. You can categorise commodities into hard and soft. Some of the most-traded commodities include agricultural commodities like rice, grains, pulses and oils. There are various strategies for commodity trading. What you need to do is check your trading objectives and choose a strategy accordingly.
Who are the participants in commodity trading in India?
What are some of the important commodities?
What is the role of stock exchange in commodity trading?
What is the meaning of Mark-to-Market?
What is the Final Settlement Price (FSP)?