How are prices determined for trading in the commodity market | Motilal oswal
How are prices determined for trading in the commodity market | Motilal oswal

How are prices determined for trading in the commodity market

Commodities, in contrast to manufactured goods and services, are products derived from primary economic activity such as drilling, agriculture, and mining. Commodities are traded in the same way that stocks are. The goal of trading is to determine the true commodity prices, speculate on profit, or assess cost risk. The concept of this type of trading dates back several years, with Amsterdam's stock market leading the way in commodities trade.

  • India's Commodity Market

The National Commodity and Derivative Exchange and the Multi Commodity Exchange are the two most major commodity exchanges in India. Commodity trading takes place on various exchanges.

  • What are the names of the participants?

You should be aware of the participants if you want to understand how commodities prices are established in India. Market prices are determined by the behavior of these parties. In general, there are two types:

Hedgers - Hedgers are businesses or industries that have a pressing need for a significant quantity of raw materials. They must purchase these at relatively consistent pricing. Steel, for example, is required for the construction industry. Industries may sign up for future purchases to hedge against price changes, guaranteeing that future steel demands are satisfied at the present price. As a result, a pattern of pricing predictability emerges, which is desired by manufacturers and industries as it aids in the efficient planning of future operations. 

Speculators - Speculators in India are individuals who do not have a genuine need for an item. They're just ordinary investors looking to profit from price changes. They usually engage in commodity trading, which entails purchasing low-cost commodities and selling them when prices rise.

  • Determination of Price

Commodity trading, like stock online trading, has grabbed India by storm. Commodity prices fluctuate in the same way that stock prices do. These are the main factors that influence commodity prices:

1. Demand and Supply Factors - The principles of demand and supply influence commodity prices, based on trader behavior. When buyers outnumber sellers for a given product, the price of that commodity rises, and vice versa.

2. External Conditions - Other elements, such as weather, might influence demand and supply. If the weather is cold, for example, the cost of heating may increase. As a result, there is a significant demand for natural gas as a commodity, which drives up its price.

3. Eco-Political Factors - Price variance in the commodities market is influenced by a country's politics and economics. Political/economic instability in one or more OPEC (Organization of Petroleum Exporting Countries) countries, for example, could affect crude oil prices, as this is where the majority of this commodity is produced.

4. Speculation - In commodity trading, speculators invest on the assumption that a commodity will be profitable or not. This causes some commodity prices to fluctuate.

Related Articles: Can the commodity markets provide cues for equity trading | Beginners Guide to Agri Commodity Trading | 5 Successful Commodity Trading Strategies | Role of Commodity Markets In India 

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