Before we understand about commodity trading, let us know what commodity means. A commodity is anything on the market that can be assigned a value. It can be a market item such as food grains, metals, oil, which help meet the needs of supply and demand. The price of the product is subject to vary according to supply and demand. Now back to what is commodity trading?
When commodities such as energy (crude oil, natural gas, gasoline), metals (gold, silver, platinum), and agricultural products (corn, wheat, rice, cocoa, coffee, cotton, and sugar) trade for a profit financial, then it is called commodity trading. These can be traded on the spot or as derivatives. Note: You can also trade live stocks such as cattle as commodities.
In a spot market, you buy and sell commodities for instant delivery. However, in the derivatives market, commodities are traded on various financial principles, such as futures. These futures are traded on exchanges. So what is an exchange?
Exchange is a governing body that controls all commodity trading activities. They guarantee a smooth commercial activity between a buyer and a seller. They help create an agreement between the buyer and the seller in terms of future contracts. Examples of Exchanges are: MCX, NCDEX and ECB. Wondering what a futures contract is?
A futures contract is an agreement between a buyer and a seller of a commodity for a future date at today’s price. The futures contract is different from the forward contract, unlike forward contracts; futures are standardized and traded according to the terms established by the Exchange. That is, the parties involved in the contracts do not decide the terms of future contracts; but they only accept the terms regularized by the Stock Exchange. So why invest in commodity trading? You invest because:
1. Commodity futures trading can generate huge profits, in a short period of time. One of the main reasons for this is the low deposit margin. You end up paying 5-10-20% of the total contract value, which is much lower compared to other forms of trading.
2. Regardless of the performance of the product you have invested in, it is easier to buy and sell it due to the good regulatory system formed by the exchange.
3. Hedging creates a platform for producers to hedge their positions based on their exposure to the commodity.
4. There is no business risk involved, when it comes to commodity trading rather than stock trading. Because commodity trading is all about supply and demand. When there is an increase in demand for a particular product, it gets a higher price, likewise, the other way around too. (can be based on the season of some commodities, eg produce)
5. With the evolution of online trading, a drastic growth is seen in commodity trading, as compared to the stock market.
The data involved in commodity trading is complex. In today’s commodity market, it’s all about managing data that is accurate, up-to-date, and includes information that enables the buyer or seller to transact. There are many companies in the market that provide solutions for commodity data management. You can use the software developed by one of those companies, for the efficient management and analysis of the data to predict the futures market.