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Commodities Market: How are prices determined?

Published : October 3, 2020

commodities market online

The commodities market is the market that regulates commodity trading in India. Commodities trading, as we all know, has gained traction among the traders in recent years. By now, we all are aware that commodity trading is a trading in the commodity derivatives through any of the four major exchanges in India including Multi Commodity Exchange (MCX), Indian Commodity Exchange (ICEX), National Commodity and Derivatives Exchange (NCDEX), and National Multi Commodity Exchange (NMCE). Of all the exchanges, the MCX and the NCDEX are the most popular ones among the traders.

Commodity trading in India allows an individual to diversify his investment portfolio by investing in various perishable and non-perishable commodities. Commodity trading not only mitigates the risk but also helps in hedging against the rising inflation rates in the economy.

Before a trader steps into the world of commodity trading, it is crucial for him to understand how the prices of the commodities for various commodities being traded on different exchanges are determined.

Various factors play an essential role and are considered while calculating the price of different commodities traded in the commodities market. A proper understanding of how the prices of the commodities are likely to move owing to these factors helps in reducing risks and maximizing the returns on investment.

Factors affecting the prices of commodities in the commodities market

Here are some factors that have an impact on the prices of the commodities traded in the commodities market:

Demand and Supply of Commodities:

The market price of the commodities is heavily regulated by the market demand of a particular commodity and the consequent supply of the goods that are being traded on a commodity exchange. A rise in the demand, influenced by any reason, might shoot up the prices of that commodity for some time. This happens because the market is not able to immediately supply the required quantity to compensate for the increased demand. Such a rise in demand can be easily attributed to a pessimistic performance of the stock market that leads the investors to shift towards other investment avenues that are safe. The law of demand and supply stays similar for equity and commodities. The demand and supply for different commodities vary during diverse time periods and depend on various factors like seasons, domestic and global conditions, and other significant factors changing its characteristics.

Global and domestic market scenarios:

Various global indicators play a crucial role in determining the prices of the commodities that are available within a country. Economic scenarios, be it international or domestic, affect the prices of the commodities. The demand and supply of a commodity are directly related to the financial condition of global and domestic market scenarios. For instance, if there is any turmoil in the Middle East countries, it is likely to have an impact on the prices of crude oil exported to other countries. Thus, this might affect the prices of commodities in the domestic market. Steel prices depend on worldwide economic factors since it is a massively and internationally used commodity. While on the other hand, cotton (Kapas) is affected less by the global economic scenarios as international factors have less impact on its prices.

Demand Speculations:

Demand for derivative investing in the commodities trading online is affected by speculative investors who enter the market with the objective of making quick profits through price fluctuations. Speculators make predictions regarding the direction of price movements and then aim to contract close before the expiration to make quick capital gains on total gains.

If an individual is not willing to take the physical delivery of goods, he can opt for cash settlement contracts. In this case, on the completion of the tenure of the contract, the difference between the price in spot trading and price stated in the future contract is paid.

The individual, in such a case, can assume either a short position or a long position, in future contracts depending upon the market assumptions.

The investors who expect the prices to drop in the future can undertake a short position to realize profits through a fail at the market price. Whereas, the investors who expect the prices of the commodities to rise in the future can opt for a long position so as to sell the commodities in the commodities market at a higher price in the future.

Final Note

Apart from these three, there are many other factors that play an important role in affecting and deciding the prices of the commodities in the commodities market. Weather conditions, rate of inflation, extraordinary events, geopolitical concerns, the rate of economic growth, and warehousing facilities all make a big difference to the price of a commodity. They hence are taken into consideration for price determination in the commodities market.

About Author

Naresh Kumar Sharma
Naresh Kumar Sharma

Naresh is the head of Research at Raghunandan Money. When it comes to studying the markets, Naresh is someone loves decoding prices, data, trends & charts. Naresh carries an equal flair for both technical and fundamental analysis and that makes him truly one of the reliable experts in the market. Naresh writes informative articles & blogs for equity, commodity, traders and investors.

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