International Commodity Market An Overview
The commodity market is a marketplace where you can buy and sell raw materials or primary products, such as oil, wheat, sugar, gold, coffee, rubber, etc. International commodity trading can be done through commodity derivatives on global market exchanges.
As an investor, you have got various options to invest your money and earn handsome returns on it. Mutual funds, stock market, commodities, and Government-backed savings schemes are some of them. In this article, you will learn about the international commodity market and how it works. Let’s get started.
What is international commodity market?
The commodity market refers to the marketplace where you can trade in commodities or raw materials used for the manufacturing of products. These commodities are sub-divided into two categories – hard commodities and soft commodities.
Hard commodities refer to the natural resources which are usually mined or extracted, such as gold, oil, coal, metals, rubber, etc. Whereas, soft commodities refer to the agricultural or livestock products, such as milk, corn, wheat, sugar, coffee, soyabeans, and meat.
How to trade in international commodity market?
International commodity trading can be done by investing in these commodities directly through Futures and Options contracts or by investing in commodity derivatives in the international market exchanges. Investors can also invest in the shares of the companies that deal in these commodities to gain profits from the commodity market.
Some major commodity exchanges in the world include Chicago Board of Trade (XCBT), Flett Exchange, US Futures Exchange (USFE), Dubai Mercantile Exchange (DUMX), European Energy Exchange (XEEE), and Ghana Commodity Exchange (GCX).
Types of commodity markets
There are two specific types of international commodity markets – Spot commodity market and derivatives commodity market.
Marketplaces which allow the traders to invest in commodities by taking immediate deliveries are known as spot commodity markets. They are also known as physical commodity market or cash commodity market since they allow the investors to take physical delivery of the commodities.
On the other hand, marketplaces which allow investing in commodities by taking Futures and Options contracts of future dates are known as derivative commodity markets. These contracts use the commodities from the spot markets as underlying assets.
Additional Read: Five Commodities to Trade in 2022
How international commodity markets work?
As mentioned, international commodity exchanges allow the investors from over the world to invest their money in global commodities and earn profits. They can either take direct deliveries of these commodities or use commodity derivatives to hedge future consumption and production.
Derivative commodity markets allow the investors to buy or sell the underlying assets at some point in the future at a price that is agreed upon today. At the expiry date of the derivative contracts, the investor can either take physical delivery of the underlying assets or roll over to close out their contracts.
Similar to the stock markets, commodity markets are prone to high market volatility. It happens because prices of commodities cannot be fixed and they can move up and down as per the demand and supply factor.
In the past, investors were required to have significant amounts of time, money, and knowledge to trade in international commodity market. In fact, it was mainly reserved for professional traders only. However, the situation is not the same today. With the emergence of full-service brokers such as ICICI Direct, ordinary investors can also participate in the global commodities.
Additional Read: All About Commodity Indices
How is it different from the stock market?
Though both commodity market and stock market may seem similar to a new investor, they are hugely distinctive. Trading in commodity market is not as straightforward as the stock market. It typically requires a special brokerage account and certain permissions. Also, since commodities are considered an alternative asset class, only accredited investors are allowed to invest in them.
However, ordinary investors can invest in commodities indirectly through the stock markets. They can put their money on the shares of companies which deals in these commodities or commodity indexes.
There are various advantages of investing in commodity derivatives market. However, before starting your investing journey, you need to be well-versed with the international commodity market news and the risk and regulations associated with them. Also, you should be aware of the fluctuations in the commodity international market prices. If possible, you can seek professional help.
Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: firstname.lastname@example.org. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.