What is Commodity Market?

What is Commodity Market?

A market that transacts business with commodities of all nature referred as commodity markets. Commodity market was initially meant only for agricultural products and that too in the local market. Industrializations, globalizations, technological advancements, increasing demand from consumers and intense competition from other players has paved way for commodity markets to cross boundaries and break barriers with regards to the commodity traded.

Commodity markets deal in the trade of commodities like gold, cotton, crude oil, pepper etc. Many items both perishable non perishable, finished goods, raw materials and semi finished goods will be traded in this market at the international level. Commodity market does not necessarily require you to buy or sell the commodities but you can even exchange them.

Commodity market works on certain principles. Firstly the trading has to be done only for standard products. Secondly the transaction takes place through a future contract. According to this contract the commodities will be sold or bought on a future date. However the price at which they are sold will be the price agreed during the contract. Similarly commodity marketing also makes use of another type of contract called spot contract. In this contract the goods are to be transferred as soon as the contract is made. However it has also been argued that the purpose of a spot contract is to exercise a future contact in due course of time. Some of the commodities investing market are commodity food market, commodity petroleum market and commodity fund investing.

Investing in Commodities

Commodity investing was initially received well only by a few sectors. Commodities investing were first restricted to the trade and exchange of commodities meant for regular and day to day use. However the awareness in the subsequent stages has brought all sectors into the manifold of commodity investing and has enabled speedy movements, transfer and transaction of goods and services. The following are the benefits of investing in commodities market:

Reduced Risks

As an investor your chances of risks are very less if you choose to invest in commodity. Therefore the gains from commodity investing will be helpful for you to balance other losses due to other financial instruments in your portfolio. The chances of risks are lower because commodity investing primarily deals with diverse items. Moreover when the contracts are entered for a future date at the current time you can exercise reasonable care and see to it that the chances of risks are reduced or nil.

Helps to Fix Price Easily

The performance of commodity market can be monitored by analyzing the performance of bond and share market because in most cases a commodity market will perform well when the others don't perform and vice versa. It is therefore possible to easily predict the prices and make the contracts by considering the ups and downs in other markets. A prerequisite for this is that the assets in the commodity market should not be correlated with the stock and bond market.

 

Factors to Look Upon Before Planning for Commodity Investing

there are certain factors you need to look upon before planning for commodity investing such as follows

Everyone can Obtain Everything

Certain countries are famous for producing certain goods while other countries may not have a surplus produce or even the quantity to meet the basic needs. Before the advent of commodity marketing and investment it was not possible for exchange of such goods and services. Commodity marketing has not only facilitated that but as a result also helped in the flow of international currencies to different countries.

Check Inflation

Commodity marketing and investment has effectively helped to control the growth of inflation in individual nations. Inflation is a result of excess cash reserves in a nation. High rates of inflation can even destabilize the nation's economy. On the contrary the excess cash is now used to buy the deficit goods from other nations in the international commodities market.

 

Diversifies your Portfolio

The presence of commodities investment itself shows that your portfolio is widely diversified. It is a well known fact that commodities investment is extremely opposite to the other popular financial instruments namely stocks and bonds. Since you have already invested in commodities you will also think of choosing other financial instruments that resemble commodities investment to make sure that they give you the required profit in combination. This means your portfolio will perform well over the year and you can concentrate on the relevant financial instruments seasonally and pertaining to the market performance.

Commodity Price Index

When you wish to engage in commodity trading you must be able to anticipate and calculate the expected prices and other financial outcomes. You must do a technical analysis of the commodities market to achieve this. Commercial price index is an important concept that plays a role in making these decisions. Index refers to the average taken in terms of specific commodities / sectors like oil and gold.

These indexes represent the trend and the direction in which the demand and supply curve is moving for that particular product.

Commodity market has grown to a large extent. There are numerous opportunities and scope for growth in the field. Lots of courses have been designed to help individual and institutional investors. In addition you can use the services of a charted accountant or financial planner. You must have a sound knowledge about the various commodities traded and the fluctuation in their prices for investing in commodity is not an easy task.