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Commodity market or goods market is a place where essential goods are exchanged by agreement among its members, according to certain rules and regulations. In this market, traders’ business is focused on two main objectives:
Taking delivery of goods for actual use or profit from their price changes.
Regulating transactions related to essential goods that are carried out according to the financial markets in question.
For example, India plays a major role in the trading of commodities and their derivatives by having 6 national commodity exchanges, including the Multi Commodity Exchange (MCX), the National Commodity and Derivatives Exchange (NCDEX) and the Indian Commodity Exchange (ICEX).
In the definition of Investopedia, a commodity is defined as a market for buying, selling and trading various raw materials or primary goods. These goods are divided into two categories: “hard goods” and “soft goods”:
Hard commodities include natural resources such as gold, oil, and rubber that must be mined or produced.
Soft goods: includes agricultural products such as wheat, coffee and meat, which are produced in the fields of agriculture and animal husbandry.
Traders can use this market to trade all kinds of goods. For example, the Chicago Stock Exchange (CBOT) and the New York Mercantile Exchange (NYMEX) offer commodities such as corn, coffee, gold, and oil, respectively.
Important commodity exchanges in the world include the London Stock Exchange and the Tokyo Stock Exchange. These markets also provide the possibility of electronic trading so that the derivatives of primary commodities are considered as important assets in the financial markets.
The main point in commodities is that these markets are concerned with the derivatives of primary commodities as well as serious commodities. This allows investors to use these goods as an option for investment and profitability during fluctuating periods of the market.
All goods or commodities are offered in two main types of markets:
Spot Markets: In these markets, physical commodities such as gold or rice are traded for immediate delivery. These markets are also known as physical markets.
Derivatives Markets: These markets include futures and other options. There are important trading contracts such as forwards and futures in these markets.
Forward and futures contracts allow owners of various commodities to trade in the future at a price agreed upon today. This will diversify the commodity market and open the hands of investors for profit. These two types of contracts use a similar structure, except that forwards are traded over-the-counter while futures are traded on an exchange.
Market regulation is one of the vital features of the commodity market. For example, in the United States, the Futures Trading Commission (CFTC) is responsible for regulating the commodity futures and options markets. The CFTC’s goal is to promote competitive, efficient, and transparent markets to protect consumers from fraud and predatory practices. Restrictions or cancellation of short-term sales are among the regulations that are implemented in financial markets to reduce the possibility of market and price manipulation.
A wide variety of goods: Commodity market is a vast online space where various goods are traded. Here we are not only talking about hard and soft goods, but the variety of goods in this market is more than this. Among the assets that are traded in this market, we can mention coffee, beef, wheat, rice, milk, sugar, diesel, cocoa, cotton, crude oil, aluminum, copper metal, gold, nickel, etc.
Placement in different financial markets: Just as the types of stocks are categorized in the stock market and their price movements are predicted according to different models, the goods also have their own categories. The classification of various commodities, especially those known as raw materials, is one of the characteristics of the commodity in the commodity market.
Hedging risks in transactions: In times of crisis such as war, recession and financial scandals, traditional assets such as stocks and bonds usually fall and bring huge losses to investors. In such a situation, goods can be used to protect investments against all kinds of risks. Commodity market and its goods are basically a strategy to control inflation and economic challenges during crises.
Due to these reasons, the potential of investing in the commodity market is very important. This market provides a direct environment for trading and transferring various goods between producers and consumers. Also, commodities can act as a safe solution to protect against market fluctuations and risks related to the economy and inflation.
