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

 

There are a bunch of more things we can trade in today rather than just companies stocks. Like - F&O (Futures & Options), Currencies & Commodities Investments, Bonds, etc. etc.

Well today, I'll like to make y'all familiar with Commodities Investments....

In this blog, we are going to cover a bunch of different things about Commodities, one must know to start investing....

Here, is the "Table Of Contents".... The below mentioned topics are the one's which are to be covered within this blog, today & from here you can even skip to a specific part of this blog, you'll like to!

Table Of Contents!

• What Are Commodities? Definition!
• Types Of Commodities Available To Us, Which Can Be Traded?
• Commodity Exchange's!
• How Are Commodities Traded? & In What Form Are Commodities Traded, In Reality? How Do 'WE' Invest?
• Risk!
• Why To Invest Inspite Of Being Familiar With The Risks?
• Have I Ever Invested In Commodities, Myself?

So here we began with the points.......

What Are Commodities? Definition!

Commodities are basically such things which originate from nature. For Example- Crude Oil, Gold, Silver, etc. So they are not artificial or man-made & one more thing about them is that most of them are exhaustible or non-renewable resources; which in simple words are such things which may not exist anymore OR in other words, some things which may come to an End, one day.

Most non-renewable resources are mined; like- gold or silver, in general. But there are some other non renewable resources-- like fossil fuel's which are---- coal & petroleum & these can be exhausted as well!

& The fact that we can trade in them is true because there prices also keeps on fluctuating over time. The fluctuations are quite similar with the share price fluctuations in share market; as per giving a chance to the investors to gain some profit BUT there are chances of having a loss as much as there are of making a profit!

Types Of Commodities Available To Us, Which Can be Traded?

There are generally 4 types of Commodities which are traded in the Commodities Market. (Note - There can be more types! But here I'm just covering the mains!)

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

Let's understand each one by one.

1. Agri Commodities

Agri Commodities are basically such things which are grown in nature. As the term "Agri" may itself refer towards; which is something/somehow connected with agriculture. Some examples of Agri Commodities are - Maize, Barley, Cotten, Sugar, Pulses, etc.

2. Base Metals

Base Metals are common metals & they are known as the opposite to precious metals. Some examples of base metals are - Copper, Aluminium, Zinc, Lead, etc.

3. Precious Metals

As the term "precious metals" refers towards, the metals which are really precious. Like for example - Gold & Silver.

4. Energy

The metals which requires energy to produce & is used almost on a daily basis by human beings comes under the category of "Energy Commodity". Copper & Crude Oil are some example of Energy Commodities.

So with this we've discussed the 4 major types of commodities which are traded in the Commodities Market!

Now, this is what brings us here, to know how in reality is the trading of commodities happening!

Commodity Exchange's!

The term "Commodity Exchange" might be new to you. But I'm sure that if you are familiar with the concept of "STOCK Exchange" then you might have already guessed that every Exchange is kind of an intermediary body; like if I compare a Commodity Exchange with a Stock Exchange then they both basically do the same things.... Just the difference is that on Stock Exchange, Stocks are traded & on Commodity Exchange Commodities are traded!

A Stock Exchange is an intermediate between a Company & the Investors (Buyers & Sellers) [In Primary Market] & an intermediate between the investors (Buyers or Sellers) themselves while they are exchanging securities. Similarly, A Commodity Exchange is an intermediate between the investors (Buyers & Sellers).

There are mainly 6 Commodity Exchanges in India....

1. Multi Commodity Exchange (MCX)
2. ACE Derivatives Exchange (ACE)
3. National Commodity & Derivatives Exchange (NCDEX)
4. Indian Commodity Exchange (ICEX)
5. Universal Commodity Exchange (UCX)
6. National Multi Commodity Exchange (NMCE)

& There are mainly 2 Commodity Exchanges in the US....

1. Chicago Merchantile Exchange (CME)
2. New York Merchantile Exchange (NYMEX)

So, as of now, we know about Commodity Exchanges.... So now let us figure out how are commodities actually traded, Today!

So here we go,

How Are Commodities Traded? & In What Form Are Commodities Traded, In Reality? How Do 'WE' Invest?

Let's first of all, figure out that in what form are commodities traded!

Now, to this, the most straight forward statement to "In What Form Are Commodities Traded?" is that, "Commodities are traded in Futures!"

{So basically NOW, the people who don't know about what are futures may not get this part of the blog. So I'll encourage y'all to read my previous article on futures. So that you'll understand all 'bout'em. I might cover the basics a bit here but honestly futures is not a kind of concept that one can completely be sure of by just SOME lines written in an blog/article. It moreover willll require an entire article/blog & a bunch of examples to make everybody clear with the concept of "Futures".

I am recommending you that 'coz, In this part of the blog I'll compare Commodity Futures with Financial Futures. So it'll be better for you to read my previous blog in which I've explained each concept in the simplest form possible.

Thank you!

Back to the Topic; 'Commodity Futures'!}

So as we know that in Financial Futures, there are 'lots of shares'. Similarly, in Commodities Futures, there are 'lots of a particular type of a   commodity'. For instance- a lot of Gold maybe of 1kg & a lot of Crude Oil might be of 100 barrels (Just For EXAMPLE!).

So that is basically how a lot size of a Commodity's future looks like.

Well, you just have to be clear.... Like for in gold.... whatever the price of gold per ounce is, then just multiply it by 100 (1 ounce = 10 Grams. 1kg = 1000Grams. Hence 1000/10 = 100 & then multiply the current price of gold per ounce by 100. "Current Price"*100 [you don't have to calculate anything in the "ONLY" certain way, I've provided! I mean ofcourse, you might have a better way.... But, Like I'm not teaching any sort of math, here. I just wanted to let you know that how much a price of "ONE LOT OF GOLD MAYBE IF ITS OF 1 KG"] ).... So this calculation is what I've done In order to obtain the price of that entire 1kg of gold if I want to buy that!

& also as we see all of these certain commodities are all measured differently as per on the basis of their own kind. Like in gold we see that it's in "Kg" & crude oil, on the other hand is in written in "barrels".

Anyways, so thats how Commodity Futures basically works. It is quite a bit similar with how Financial Futures works. But of course there are some difference we'll cover in this blog.... So CONTINUE READING!

So as of now we know that how do these all Futures works. So now let's come to the 'time duration' of a Commodity Future Contract!

So as we know that in Financial Futures there are mainly 3 types of Future Contracts one can buy (Near Month, Next Month, Far Month) & they are of different time durations & among them the longest one is of 3 months.... Which means that the future contract in which we can hold a future for the longest is just of 3 months....

BUT in Commodity Futures we can hold a future for upto 6 months.

& One extreme similarity between the Financial and the Commodities Future is that, they both can be traded further before reaching there expiry date.

Well, now let us discuss which most of you might have been awaiting for since.

How Can 'WE' Trade In Commodities?

As to buy Stocks/Shares we don't go to the Stock Exchanges. Similarly, we don't have to go to the Commodity Exchanges to buy Commodities. We can trade them from home/any where through DP's (DEPOSITORY PARTICIPANT'S). DP's are basically bodies which helps us to trade via mobile phone. It can be anything between banks to brokers. Here, I refer it towards as the trading apps.

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If you want to gain information regarding the Stock Market.

Then,

You May Read: What Is Share Market? (Basics!) Things About Share Market Every Beginner Must Know!

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Risk!

There is risk in literally every single trading platform from Stocks to Bonds & Commodities to Currencies. If there is loss then there is profit, as well & vice versa!

Well, Did You Know? --> That in Commodities, mostly those people tend to invest who work or have a good knowledge within/of a specific feild.

Like, for example--> In Gold, mostly the gold producing companies tend to invest. & Crude Oil producing Companies tend to invest in Crude Oil; etc. & As I said people with good knowledge also trade in Commodities.

& There is something which somehow dictates that why/what's the reason behind JUST the companies or knowledgeable people Investing & getting Returns from Commodities & not the one's like you and me (ordinary people).

So there is a fact which states that the price of a commodity may fall or rise within just a fraction of seconds. & IT IS TRUE.

& THE MAJOR REASON WHICH MAKES THE ABOVE MENTIONED FACT TRUE IS OF HAVING GLOBAL EFFECT'S ON A CERTAIN COMMODITY'S PRICE.

Lets make it a bit more transparent.......

If just in case there is an issue in the UAE with the production of Oil. Then the commodity price of Oil will fall in seconds in India as well as the US & it'll, in short affect all the countries &'ll result as a fall in the Oil Price all over the world (Globally).

So if somewhere something is produced more or less then it'll have an impact over the specific Commodity's price.

You May Read: What Causes Share Price To Flucate So Much Over Time? Major Factors Affecting The Share Price, Today!

Why To Invest Inspite Of Being Familiar With The Risks?

Well, do you know about the old times when paper money was just not a thing.... People used Gold & Silver as means of money. & To this day the reality might seem a bit different but the real money will remain Gold & Silver, only. How? .... Well, this paper money's value will decrease over time due to inflation. What I mean is that if you calculate the money you'll save within these 20 to 30 years in total, then the known amount will be huge in today's date but trust me it won't remain that huge after those 20-30 years. Okay so not going into future & taking another valid example. Let's remember the past, instead.... I Don't Know about you, but in India, what I know is that the value of 10rs. Was alot more in the 90s then it is today. Because as soon as the time of 2000s came the inflation was moving up & today the value of 10rs. is just not equal to the value of the 10rs. it used to be in the 90s.

Like I know it is the same -- 10 rs. & 10rs. . It seems fine but the thing is taht you won't get the same things which you used to 90s, today. So the things we could've bought in the 90s with 10rs would have been a lot but today we just can't. But why the money is still the same. But still, the value decreased!

I know there are so many confusions so I may write a blog on this topic.... Tell me if you want me to! For now let's just come to the topic of the Gold & Silver being the Real Money.

So, investing in Gold & Silver will always pay off, it's real money.... It was precious. It is precious. & It'll remain precious. I know as of now we've discussed that a commodity future will expire some day. So how'd you hold on to that. Well, first of all you should invest the money you don't need right now (money at rest//savings) & another thing is that you can reinvest over & over again as you want to hold the Gold as it'll never loose it's value.

Or you can just buy physical gold & all & you may sell it whenever you want to.... If you really wanna hold it for long that's what I say about that. But you don't really have to listen to me. You just do everything you want to do. I randomly won't ask you to start investing in Commodities. & I have not recommended anything either. I'll just say that the people who find it interesting and want to invest in it. Should first have, enough knowledge in order to avoid loss. You should kind of be analysing every country's progress & paying close attention to how much production of a specific Commodity is being produced over time by a specific Country & learn all those other essential things you should know. But if you really are ready to invest then seriously you must have a good amount of knowledge. I just mean that don't be in a rush! Take your time! Think! & Then Act!

#NO RECOMMENDATIONS, here By The Way!

The one who'll invest will invest &'ll have the complete responsibilty on their own selves. So take action at your own risk! I haven't recommended anything! & I really won't!

My job was to make y'all familiar with this concept of "Commodities & Introducing You To the Commodity Market"!

Well, I think the next part is for you; if you wanna know.......

Have I Ever Invested In Commodities, Myself?

& The Answer is NO. I've been saying the same for several times in a row, I guess. Coz I haven't invested in Futures, Shares, etc.... to this day. Sincerely, I would like to some day &'ll make sure to write a blog based on my experience!

So, ON THE BASIS OF WHAT DID I WROTE THIS ARTICLE OR BLOG ON?

Again, I wrote it completely on the basis of my research & the information provided here might not be 100% accurate. So I really would suggest my readers to first analyse a specific thing properly. Because these were just some basic core concepts of "COMMODITIES".

But I again would say that I have not & I am not recommending anything. If anybody will invest then it'll be of their own responsibility. Nobody else is to be blamed by that.

So, now you let me know would you invest in Commodities?

& also do let me know if there is something I missed mentioning in this blog & don't hesitate to ask me something or even feel free to correct me if I am wrong somewhere. Just leave a COMMENT & let me know if there is any sort of issue regarding this article/this website.

Thanks For Reading!