What Is a Commodity Exchange and Its Types in India | Motilal Oswal

What Is a Commodity Exchange and Its Types in India

Simply put, a commodity exchange is like a stock exchange. On a stock exchange, stocks are bought and sold, and it is a place where the trading of stocks takes place. So if you wish to know the answer to the question, “What is a commodity exchange?”, you have to understand that it is like a stock exchange, but only for trading, that is, the buying and selling of commodities. The concept of a commodity exchange may be confusing to grasp by the layperson as people think of commodities as actual goods bought or sold. Commodity exchanges deal with goods, but the term “commodity” is reflected differently. 

What is a Commodity Exchange

A commodity exchange, or a commodities exchange, refers to a legal entity that decides and enforces regulations and processes for trading regular commodity contracts and investment products related to this. A commodity exchange is also a physical place in which trading occurs. Nonetheless, most commodity exchanges are in the form of electronic online platforms for trading. The market of commodities is huge, and trillions of dollars are traded daily. 

Traders rarely make physical deliveries of commodities via a commodity exchange. Rather, traders trade futures contracts in which parties enter an agreement to purchase or sell a certain amount of any commodity at a fixed price agreed on in advance. This commodity price, according to a contract, remains the same regardless of its current price in the market. The contract which is agreed upon has a date of expiry. The commodity which is most traded in a futures contract is the commodity of crude oil. Commodity exchange meaning becomes clearer if you know that “commodities” which are referred to in exchanges and markets are not necessarily finished products, but usually raw materials. 

Understanding Commodity Exchanges

Commodity exchanges are the central location for commodity trading. The commodity markets initially started with transactions of trading in agricultural goods and products. These included corn, cattle, pigs and wheat in the 19th century. Of course, it is clear from the previous mention that commodity markets began abroad, mainly in the USA. At the time when commodity trading began, Chicago was the primary hub for trading commodities. The city had a lot going for it as it was a main transit point for east-west travel, and was located near the farm belt. Chicago was also important as it had easy access to the railroad. 

Have you got your answer to the question, “What is a commodity exchange?” now? You must have a better idea about commodity exchanges if you had little or no knowledge before. You should note that the modern commodity exchanges of today trade several kinds of investment vehicles. These are used by several investors ranging from investment speculators to commodity producers. As the US markets, even in terms of stocks, drive most global markets, you should know what the US commodity exchanges are. The CME, or the Chicago Mercantile Exchange and the NYMEX, or the New York Mercantile Exchange are the world’s top commodity exchanges. The CME Group is the leader in a range of derivatives markets, responsible for handling around 3 billion contracts amounting to a total worth of a quadrillion dollars each year. 

The leading commodity exchange in Europe is the ICE or the Intercontinental Exchange. All the commodity exchanges mentioned so far are electronic online exchanges. However, the LME, or the London Metal Exchange, is probably the only commodity exchange with a physical presence. Coming to India, while commodities have been traded here for years, several impediments to trading have occurred and an official exchange was not realized till 2018. Commodity trading exchanges in India mainly include the Multi Commodity Exchange of India Ltd. (MCX). Other important commodity exchanges in India include the ones within the National Stock Exchange and the Bombay Stock Exchange, the Indian Commodity Exchange and the National Commodity and Derivative Exchange. 

Types of Commodities in India

The commodities most traded in the world, in general, are crude oil, gold, cotton, natural gas, and lumber. In India, commodity markets comprise spot/cash markets in which traders exchange physical commodities and delivery is immediate. Then some derivatives markets deal in forwards and futures contracts. You can trade in the following types of commodities

  • Gold - In India, gold has several uses, and is mainly traded as a hedge against inflation. Most Indians possess gold in some form or other and it is viewed as a commodity with value attached, never letting investors down regarding price. 
  • Crude Oil - This is a sought-after commodity both globally, and by investors in India. The commodity yields by-products such as diesel and petroleum. The demand for crude oil is only increasing in India due to the increase in the manufacture and sale of vehicles. The global consortium that has a key role to play in the production of crude oil is OPEC. The USA, Russia and Saudi Arabia are some leading nations that produce this commodity. 
  • Soybean - Among the leading commodities traded today, soybean production and its price is usually affected by weather, biodiesel demand and demand for dollar currency. 

Commodity trading exchanges in India deal with the following commodities according to different exchanges where trading takes place: 

  • Types of Commodities Traded on the MCX - Bullion (silver, gold), energy (crude oil, natural gas), base metals (brass, aluminum, lead, nickel)  and agricultural produce (cotton, rubber, palm oil) are traded on this exchange.
  • Types of Commodities Traded on the NCDEX - Cereals and pulses (barley, wheat, paddy, moong), Sugar, Fibre (Guar gum, cotton), Spice (coriander, pepper, cumin seeds, turmeric), oil and oil seeds (soybean, refined soy oil, castor seed, mustard seed).

Commodity Investment

In India, although commodity investment is not as popular as investing in the good old stock market, it is catching up. Commodity prices tend to be influenced, to a large extent, by several external factors like the weather, the demand and supply, geopolitical events and the general state of any economy. When you invest in commodities, you should do your research well enough so you see some good gains.

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