Fundamentals of Commodities Trading

Investing in the commodities market may offer Indian traders a distinctive potential opportunity to broaden their portfolio by exploring a different asset class. However, the commodities market is influenced by macroeconomic policies, economic indicators, and geopolitical factors. It may experience price fluctuations in resources such as oil, wheat, metals, and energy. Hence, this environment requires a keen understanding of global trends to develop structured investment strategies. Let’s take a look at them.

Table of contents

• Understanding commodity trading
• Using the economic calendar for commodities
• How to invest in commodities?
• Advantages of commodity trading
• Disadvantages of commodity trading
• Commodity trading strategies

Understanding commodity trading

Commodity trading means the buying and selling of commodities in the form of standardised contracts through dedicated commodity exchanges. Globally, these commodities are usually categorised into four broad types:

• Energy – Energy commodities used for industrial and non-industrial purposes, such as coal, oils, natural gas, ethanol, and uranium.
• Agricultural – Goods such as wheat, cotton, sugar, coffee, and livestock.
• Metals – Industrial metals such as iron, aluminium, copper, and nickel, and precious metals such as gold and silver.
• Environmental – Commodities such as carbon emissions and white certificates.

In India, commodity trading is carried out across two major exchanges, each specialising in a different set of commodities:

1. The Multi Commodity Exchange of India (MCX), which primarily trades in the following commodities:
   • Energy goods like natural gas and crude oil.
   • Metal commodities such as lead, copper, and zinc.
   • Bullion like silver and gold.
2. The National Commodity and Derivatives Exchange (NCDEX), which primarily trades in the following commodities:
   • Oil and oilseeds, which include mustard seeds, soybean, castor seeds, etc.
   • Soft goods like sugar.
   • Cereals and pulses such as maize, barley, wheat, rice, etc.
   • Spices such as turmeric, pepper, and coriander.
   • Fibers such as cotton and guar seeds.

Using the economic calendar for commodities

The economic calendar captures high-impact events that may serve as a guide for traders in the commodities space. Instances such as RBI policy announcements, monsoon forecasts, or reports on trade balances are important indicators that may affect commodity price movements. Thus, it is important to understand the timing of these events to plan entry and exit strategies.

Read Also: Commodity Market Timings in India: Full Guide (2025)

How to invest in commodities?

• Spot trading

Spot trading involves the buying and selling of physical commodities for immediate payment and delivery.

• Futures contracts

When a contract of a commodity is bought and sold for a future delivery date, at a predetermined price, it is called a futures contract. The supply and demand forces for these commodities and their market expectations determine the price of these contracts.

• Options contracts

When the contract provides the trader the right to buy or sell a commodity on or before a specific date at a predetermined date, without having the obligation to do so, it is called an options contract. Traders aim to predict the future prices of commodities to earn potential returns.

• Commodity ETFs

Exchange-traded funds (ETFs) may serve as investment tools that enable individuals to broaden their portfolios without having to physically acquire the underlying assets, such as commodities in this instance. These monitor and track the performance of a collection of commodities or a commodity index.

• Commodity shares

If an investor wants exposure to the commodities market without directly investing in the asset itself, they may purchase shares of a company that is involved in the value chain of one or more commodities, ranging from procurement to manufacturing to distribution.

Advantages of commodity trading

• Diversification—Investing in commodities may provide a potential hedge against uncertain market conditions and serve as a diversification instrument for investors. For instance, during times of geopolitical instability, assets such as gold and silver may offer potential opportunities.
• Inflation – Inflation can drive up prices of commodities, which may favourably impact commodity traders. For investors holding commodities in their portfolio, this rise may increase the overall value of their investments.
• Liquidity— Compared to real estate, commodities may offer higher liquidity and may be converted to cash more easily.
• Leverage – Traders might take positions in the commodities market and strive for potentially higher returns by paying a small percentage as margin.

Disadvantages of commodity trading

• Leverage – Leverage may offer advantages, but it also carries the risk of magnified potential losses if the outcomes of the positions are not favourable. Therefore, it is deemed crucial for traders to understand the workings of the commodities market and to approach their investments with diligence.
• High volatility – Commodity trading offers a unique investment opportunity but also exposes investors to the inherently volatile character of commodity pricing.
• Lower potential returns from long-term investments—Commodity prices fluctuate and are significantly affected by macroeconomic changes. This may lead to value degradation for long-term investors over extended durations.
• Uncertainty—Commodity prices are heavily impacted by economic shifts and global events around the world, potentially causing price fluctuations. Traders who are not constantly updated about macroeconomic indicators may be vulnerable to misjudgements.

Read Also: Arbitrage Trading: Meaning, Mechanism and Challenges

Commodity trading strategies

Traders usually employ various strategies to potentially generate returns through commodity trading.

• Trend following strategy – Price movements follow trends. Identifying these with the help of moving averages, trend lines, and momentum indicators may help traders time their entries and exits.
• Range trading strategy – Traders try to identify resistance and support levels in commodity prices. Buying at support levels and selling at resistance levels is the objective.
• Spread trading strategy – This strategy involves the simultaneous buying and selling of related commodities, leveraging the price difference between them. Considered to have lesser impact from market-wide corrections, a lot of traders usually use them for futures contracts.
• Hedging – Used by producers and consumers of commodities, the hedging strategy is employed to cushion stakeholders from sudden price movements due to unforeseen situations.

However, none of these strategies can guarantee returns or eliminate the risks associated with commodity trading.

Conclusion

Traders are advised to stay informed about world events that might impact commodity prices and use risk management strategies such as stop-loss orders and position sizing to seek to mitigate the impact of downsides. By combining fundamental and technical analysis with a structured approach, traders may navigate the changing commodity market with a more informed approach and potentially build a more diversified portfolio.

Frequently Asked Questions

What are examples of trade commodities in India?

Commodities traded in Indian commodity exchanges include bullion (silver, gold), agricultural goods (wheat, sugar, oilseeds), energy (natural gas, crude oil), and metals (copper, nickel).

What are the best commodities for trading?

There is no single ‘best’ commodity. It depends on various factors such as macroeconomic indicators, market conditions, trading strategies, and the risk tolerance of the trader.

What are the pros and cons associated with commodity trading?

Traders may gain potential returns and diversify their portfolio through commodity trading. However, traders may also face leverage risk and market risk.

What strategies can traders use for commodity trading?

Strategies such as range trading, trend following, hedging, and spread trading may be used for commodity trading.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

 This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.