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How Does The Commodity Market Work?

7th June , 2016 Posted Under - Blog

Markets have become increasingly liberal and with cross border investments by retail investors the market was too overburdened for investments solely in stocks and indexes. Hence commodities were introduced on the year 1875 by the Bombay Cotton Trade Association.

What is commodity market?

Quite literally commodity market is a market for commodities. You can buy and sell listed commodities at an ongoing price of the market. You may or may not take the delivery of the traded commodities. The commodity market is regulated by the Forward Markets Commission. Commodity market lists down items of metals, agriculture, energy etc for trade. A few examples are, crude oil, gold & silver, rice, etc. There are three national level commodity exchanges in India, namely:

  1. Multi Commodity Exchange
  2. National Commodity and Derivatives Exchange
  3. National Multi Commodity Exchange

why invest in commodities

How Does The Commodity Market Work?

Commodity market in fact has much more business than equity

markets and has a lot of potential, simply because here you can play big with relatively small amount in your hand. In equity you have to pay the entire money once you have purchased it, commodity on the other hand allows you to purchase more with less because it is marked to market every week.

Let’s say you have Rs. 5000 and you have two options:
a. You can invest in the shares of XYZ Ltd @ 50Rs per share.
b. You can invest in commodities.

Now if you decide to go with option a and invest in that company, you’ll get 100 share of Rs 50 each and you’ll have to pay the money upfront.

The way commodity works is different. Here you need not pay the entire money, instead you deposit a margin of money. If you have to purchase a simple commodity like say oil and the margin money is 10% of the value purchased; you’ll be able to purchase oil worth Rs 50,000.

There’s not much required to invest in the commodity market. Brokerage fee is quite minimalistic when it comes to investing in commodities. All you need to have is a bank account, a demat account, PAN card and a valid address proof.

When & Where to Invest in Commodity:

There are several ways of investing in commodity markets, there are futures contract, forward agreements, options, mutual funds, indexes and many other derivative products. There is no right or wrong time in commodity markets as the markets have developed. Even when the industry prospects don’t seem right, you can short the commodities and call on it later and make a profit. You can hedge your possible losses through diversification. There are a lot of possibilities but what is required is proper knowledge and a smart broker.

Grovalue.in is one such broking firm that assists you and make these transactions hassle free. They have the modern tools and analytics required to build your portfolio and bring profits to the table.