What Are Commodity Investments? Introduction To Commodities Market! (#9)

 

What Are Commodity Investments? Introduction to the Commodities Market

There's a lot more to trade in the markets today beyond company shares — F&O (Futures & Options), Currencies, Bonds, and Commodities are all traded too. Today, we're covering the basics of Commodity investments.

Table of Contents

• What Are Commodities? Definition
• Types of Commodities Available to Trade
• Commodity Exchanges
• How Are Commodities Actually Traded?
• Risk
• Why Invest, Despite the Risks?
• Have I Ever Invested in Commodities Myself?

What Are Commodities? Definition

Commodities are things that originate from nature — crude oil, gold, and silver, for example. They aren't artificial or man-made, and most are non-renewable resources: things that, in theory, could eventually run out or become harder to obtain.

Most non-renewable resources are mined, like gold and silver. Others, like coal and petroleum, are fossil fuels — also exhaustible over time.

Commodity prices fluctuate constantly, much like share prices do — creating the same basic opportunity (and risk) for investors: the chance to profit, alongside the chance to lose money.

Types of Commodities Available to Trade

There are four main categories of commodities traded in the market (there can be more niche subcategories, but these are the core four):

1. Agri Commodities
2. Base Metals
3. Precious Metals/Bullions
4. Energy

1. Agri Commodities

These are commodities grown through agriculture — examples include maize, barley, cotton, sugar, and pulses.

2. Base Metals

Common, widely-used metals — the counterpart to precious metals. Examples include copper, aluminium, zinc, and lead.

3. Precious Metals

Metals valued for their rarity and demand — gold and silver are the classic examples.

4. Energy

Commodities used to produce or generate energy, consumed daily across the world — crude oil and natural gas are common examples.

Commodity Exchanges

If you're already familiar with the concept of a Stock Exchange, a Commodity Exchange works much the same way — just with commodities being traded instead of company shares.

A Stock Exchange acts as an intermediary between a company and investors (in the Primary Market), and between investors themselves (in the Secondary Market). A Commodity Exchange, similarly, acts as an intermediary between buyers and sellers of commodities.

In India, the commodities market today is dominated by two exchanges:

1. Multi Commodity Exchange (MCX) — India's largest commodity derivatives exchange by a wide margin, handling the vast majority of trading volume across metals, energy, and bullion
2. National Commodity & Derivatives Exchange (NCDEX) — the leading exchange for agricultural commodities specifically

A smaller player, the Indian Commodity Exchange (ICEX), also remains active. A few other exchanges that once operated in this space — including ACE Derivatives Exchange, Universal Commodity Exchange (UCX), and the National Multi Commodity Exchange (NMCE) — are no longer functioning as trading platforms today.

In the U.S., commodity trading is centered around:

1. Chicago Mercantile Exchange (CME)
2. New York Mercantile Exchange (NYMEX) — which has operated as a division of CME Group since 2008, rather than as a fully independent exchange

How Are Commodities Actually Traded?

Commodities, in practice, are traded through Futures contracts.

→ Related: What Are Futures (In Derivatives)? Basics of Futures(#8) — if you're not yet familiar with how futures work, that's worth reading first, since a lot of the mechanics carry over directly.

Just as Financial Futures are traded in "lots" of shares, Commodity Futures are traded in lots of a given commodity — for instance, a lot of gold might be set at 1kg, while a lot of crude oil might be set at 100 barrels (these are illustrative examples; actual lot sizes are set by the exchange).

To roughly estimate the value of a lot, you'd take the commodity's current market price and multiply it by the lot size — for example, the price of gold (commonly quoted per ounce, or per 10 grams) multiplied out to the full lot weight. Different commodities are quoted in different units — gold in ounces or grams, crude oil in barrels — so it's worth checking the specific unit convention for whichever commodity you're looking at.

Contract duration is another key difference from Financial Futures. Where Financial Futures max out at 3 months (Near, Next, and Far Month), Commodity Futures can be held for up to 6 months. As with Financial Futures, Commodity Futures can also be traded further before reaching their expiry date, rather than only being held to term.

How Can You Actually Trade Commodities?

Just as you don't need to physically visit a Stock Exchange to buy shares, you don't need to visit a Commodity Exchange either. Commodities can be traded from anywhere, through a Depository Participant (DP) — a bank or broker, most commonly accessed today through a trading app.

→ Related: What Is the Share Market?(#2) — for more on how DPs and demat accounts work.

Risk

Every trading platform — stocks, bonds, commodities, currencies — carries risk. Where there's the possibility of profit, there's also the possibility of loss, and vice versa.

Worth knowing: commodity investing tends to attract people with direct knowledge of a specific field — gold-producing companies investing in gold, crude oil producers investing in crude oil, and so on, alongside individuals with strong sector-specific knowledge. Commodity prices can shift within seconds, largely because they're highly sensitive to global events. If oil production is disrupted in one region, oil prices can move within seconds across every country trading it — a genuinely global, interconnected market.

→ Related: Who Decides the Price/Value of Shares in the Share Market?(#4) — similar demand/supply forces are at play here.

Why Invest, Despite the Risks?

Before paper currency existed, gold and silver effectively served as money. In a sense, that reality hasn't fully changed — paper currency loses purchasing power over time due to inflation, while gold and silver have historically held their value far more consistently.

→ Related: What Is Inflation? What Causes It?(#28)

A simple way to see this: ₹10 in the 1990s could buy meaningfully more than ₹10 can today, even though the number itself hasn't changed. That's inflation eroding the currency's purchasing power over time — while gold and silver have generally retained (and often grown) their value across the same period.

That's a core part of the argument for holding gold or silver: as a long-term store of value, using money you don't need in the near term, and reinvesting or holding as you see fit.

No recommendations here — investing in commodities, like anything else, is a decision that carries full responsibility for the person making it. Anyone interested should build real knowledge first: understanding global production trends, country-level output, and the specific dynamics of whichever commodity they're considering, rather than rushing in.

Have I Ever Invested in Commodities Myself?

Not yet — I haven't personally invested in futures, shares, or commodities to this day, though I'd like to eventually, and I'll write about that experience when I do.

This article was written based on independent research, so I'd encourage readers to do their own further analysis before acting on any of it — these are meant as core introductory concepts, not investment guidance. As always: any investment decision, and its outcome, is the investor's own responsibility.

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Would you consider investing in commodities? And is there anything you think I missed here? Let me know in the comments.