What is a commodity-
A commodity is a product, which is of uniform quality and traded across various markets. There are generally two types of commodities, ‘hard commodities’ and ‘soft commodities’. Hard commodities include crude oil, iron ore, MCX gold and silver and have a long shelf life. Agricultural products such as soybean, rice or wheat, are considered ‘soft commodities’ since they have a limited shelf life. These commodities have to be similar and interchangeable or ‘fungible’. For example, soybean from one country or market should be of the same quality wise as soybean from another, or gold in one country should be of the same purity as gold from another. Consumer products like televisions or computers vary from manufacturer to manufacturer and hence cannot be traded as commodities. But now, electricity, bonds, and currencies are also traded as commodities across the globe.
These commodities are traded across markets situated in different corners of the world through commodity exchanges such as the New York Mercantile Exchange, the Chicago Board of Trade, the London Metal Exchange, etc. These exchanges consist of traders who are classified as hedgers or speculators. Hedgers are actual manufacturers or farmers who want to sell their commodities at a guaranteed price, so that they are insulated against any price fall or fluctuations in the market. Speculators are traders who enter into the market solely to make a large profit. If the speculator has information that natural disasters are destroying wheat in a particular country, he will try and purchase wheat as soon as possible, since he would expect the price of wheat to rise in the coming days. Speculating requires a keen business sense and an in-depth understanding of the market or the losses incurred could be significant.
Why invest commodity market..
Commodity market is the place where commodities are traded in futures or spot trading, these commodities are traded in two main exchanges as MCX and NCDEX. Trading takes place in both of these exchanges for the commodities like gold, silver, crude, metals, and agricultural products such as grains, pulses, spices, etc.