Commodity Exchange is a place where commodity contracts and related investment products are traded. It’s a marketplace where anyone can buy, sell and trade in commodities.
Best part of exchanges is that they are highly regulated. It has rules, regulations and procedures for trading financial securities.
In the United States, we have two well known commodity exchanges; they are the Chicago Mercantile Exchange (CME) Group and the New York Mercantile Exchange (NYMEX). NYMEX is part of CME Group.
New York Mercantile Exchange (NYMEX) handles many commodities in the United States.
Similar to NYMEX, we have the Intercontinental Exchange (ICE) in Europe and London Metals Exchange in London, United Kingdom.
In India, we have many commodity exchanges. Two well known and popular commodity exchanges in India are Multi Commodity Exchange of India (MCX) and National Commodity and Derivatives Exchange of India (NCDEX). Both are based out of Mumbai, India.
MCX is the largest commodity trading market in India.
NCDEX is a leading agricultural commodity exchange in india.
Commodities are basic goods and essential materials traded on an exchange or speculated using futures and options contracts.
Here is a list of popular commodities traded around the world in commodity exchanges;
- Agricultural products like wheat, Lumber and corn
- Metals
- Cotton
- Cocoa
- Sugar
- Coffee
- Copper
- Silver
- Gold
- Natural Gas
- WTI Crude Oil
- Brent Crude Oil
Brent Crude oil, WTI Crude Oil, Natural Gas, Gold and Silver are the top five traded global commodities.
How commodities are traded?
In general, commodities are traded around the world via futures contracts.
Commodity exchanges are connected with an electronic trading platform through which market participants can buy and sell commodity contracts.
We have two different types of market participants in a commodity market: hedgers and speculators.
Hedgers are generally producers and manufacturers of commodities who hedge their risk in the market.
For instance, suppose a cotton farmer wants to hedge the risk of price movement on his produce. He / She prefers to enter a future contract of cotton. With this, if the price of the cotton falls in the local market, he / she can sell the future contracts for profit. In case price rises, he can sell the produced cotton at a higher price in the local market.
The other participant in the commodity market is a speculator. These people are generally traders who want to profit on the price movement of the commodity. The main purpose is to make short term profit through trading by predicting future price movement of the commodity.
For example, Mr Kumar is expecting that the price of cotton will go up next month. So Mr Kumar buys a cotton futures contract and sells when the price increases. In this case he is not taking any physical delivery. He makes profit due to the rise in price.
Trading in commodities is speculative. Only the moves of commodity price are important here.
One can indirectly trade in commodities through stocks and exchange traded funds (ETFs) of those companies who do business in the same commodity.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. The information in this article is provided for educational purposes. None of the information should be interpreted as advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
