What is commodity investment? What are the Different types of commodity investment?

What are Commodities?

Commodities are Physical products, that you can touch. Generally it appear naturally in the ground or are agriculturally cultivated such as:-

♦ Naturally in the ground:- 

Coal, Oil, Gas, Diamond, Gold, Silver, Bronze, etc.

♦ Agriculturally cultivated:-

Wheat, Rice, Corn, Soyabean, Coffee, Sugar, Cotton, Salt, Cocoa, etc.

Every commodity belongs to a particular sectors. Which are as follows:-

★ Energy:- Natural Gas, Crude oil, Electricity, Refined Product.

★ Industrial Metal:- Iron, Copper, Bronze, etc.

★ Precious Metal:-  Diamond, Platinum, Gold, Silver, etc.

★ Agriculture:- 

• Live Stock:- Poultry, Cattle, Hogs, etc.
• Grains:- Wheat, Rice, Beans, Pulses, etc. 
• Softs (Cash Crops):- Coffee, Cotton, etc.

Returns on commodity investments are based on changes in price rather than on an income stream such as interest, dividends, or rent.

Commodity Price  Determination:-  

Commodity prices are determined by Demand and supply, and Demand and supply depend upon  numbers of factors such as:-

• Economic Cycle.
• Weather Conditions.
• Inventory Levels.
• Govt. Policy.

In fact holding commodities (i.e.- the physical products) incurs costs for transportation and storage. Thus, most commodity investors do not trade actual physical commodities but rather trade Commodities derivatives. 

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What are commodities derivative?

Ans:- Derivative is a Financial Contract which derive its value from some underling assets. and here the underling is commodity.

In simple Commodity derivative is a contract between two person to Buy or Sell a certain commodity at a future date at a price fixed today.

What are the  Different types of commodity investment?

Ans:-

♦ Investment in Physical Commodity:- 

An investor may choose to buy a commodity in its physical form (Like:- Wheat, rice, cotton, gold, silver, etc.) and hold it for a certain period of time and then sell it to another trader in a Physical Market (or mandi). 

♦ Investment in Commodity Derivative:- 

it is a contract between two person to Buy or Sell a certain commodity at a future date at a price fixed today. Commodities  Derivatives are listed on a commodity exchange. A commodity exchange is like a Place (like:- stock exchange) but, here Futures contracts are taking place.

Their are 3 main National Commodity Exchanges in INDIA:-

• Multi Commodity Exchange(MCX).

• National Commodity and Derivative Exchange(NCDX).

• National Multi Commodity Exchange(NMCE).

(You can invest in 100+ product listed in these Exchanges)                      

♦ Investment in Commodity Exchange Traded Fund  (like- Gold ETF, etc.), :-  

Exchange Traded Funds (ETFs) are made of a collection of securities usually consist of public equities that relate to a particular economy, market, index, sector, industry.  Similarly but, here Commodity ETFs are comprised of  Future contracts or Asset backed contracts on Commodity or Groups of Commodities. When an investor purchases a commodity ETF, they normally do not own a physically asset but instead own a sets of contracts backed by commodity itself. 

     

You must consult a Commodity investment Adviser before investing your hard earned money in any of above mentioned categories.

Thank you.. Stay happy & safe..