Commodity trading refers to derivative trading on commodities. Physically exchanging a commodity between a seller and buyer is not feasible due to transportation and storage costs.
Instead, commodity trading is done to realize returns on the changes in prices of commodities rather than through interest, dividends, or rent.
The underlying security for a commodity derivative may be a single commodity or an index of commodities such as the index of a commodities exchange.
Points to be kept in mind while doing commodity trading are:-
- It does provide high leverage but accompanied by high risk
- Thorough research of the commodity market is suggested before investing in commodities
- The supply chain of commodities should be very well understood
- Commodities like crude oil are imported from various countries. Rules, regulations, and policies that govern the law of those countries shall be kept in mind so as to avoid the risk of price fluctuation
Commodity Exchange Act
Commodity Trading is regulated by the Commodity Exchange Act, which was passed by the U.S. government in the year 1936. It requires all the commodities and related futures and options to be traded on regulated commodity exchanges.
Commodity trading takes place over the commodity exchanges. Some of the commodity exchanges in India are:-
- Multi Commodity Exchange (MCX)
- Indian Commodity Exchange (ICEX)
- National Commodity and Derivatives Exchange (NCDEX)
- National Multi Commodity Exchange ( NMCE)
Some of the commodity exchanges in the world are:-
- New York Mercantile Exchange (NYMEX)
- Intercontinental Exchange
- European climate exchange
- Chicago Mercantile Exchange
- Dubai Gold and Commodity Exchange (DGCX)