Dr. R.A.N.M ARTS AND SCIENCE COLLEGE�Affiliated to Bharathiar University , �Accredited with “ B+” NAAC�
Mrs. N. Geetha M.Com (CA)., Assistant Professor,� Department of Commerce (CA)
Course Name : Futures & Options
�Welcome You All
Commodity Market:
A commodity market is a marketplace for buying, selling, and trading raw materials or primary products.
Commodities are often split into two broad categories: hard and soft commodities. Hard commodities include natural resources that must be mined or extracted, such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans, and pork.
Trading commodities goes back to the dawn of human civilization as tribal clans and newly established kingdoms would barter and trade with one another for food, supplies, and other items. Commodity trading predates that of stocks and bonds by many centuries. The rise of empires such as ancient Greece and Rome can be directly linked to their ability to create complex trading systems and facilitate the exchange of commodities across vast swaths via routes like the famous Silk Road that linked Europe to the Far East.
Benefits of Commodity Market
There are several benefits of commodity market to market participants
Contributes to portfolio diversification
The commodity market provides an avenue for diversifying investment portfolios. By including commodities in their investment mix, individuals and institutions can reduce their exposure to risks associated with traditional asset classes like stocks and bonds.
Mitigates risk
Commodity trading allows market participants to hedge against price volatility and manage risk effectively. Hedging involves taking offsetting positions in the futures market to protect against adverse price movements in the physical market. This helps participants, such as farmers, producers, and traders, to safeguard their interests and stabilize their revenues
Boosts investment in the agricultural sector
The commodity market plays a vital role in promoting investment in the agricultural sector. By providing a platform for price discovery and trading, it incentivizes farmers to produce more efficiently and enhances their income prospects. Increased investment in agriculture leads to improved infrastructure, technology adoption, and overall development of the sector.
Facilitates price predictability
The commodity market enables market participants to anticipate future price movements. Through the trading of commodity futures contracts, participants can gain insights into market sentiment and expectations. This price predictability helps various stakeholders, including farmers and processors, in making informed decisions related to production, procurement, and pricing.
Enhances aggregation and financing in the agricultural sector
The commodity market facilitates the aggregation of commodities from various sources and enhances their marketability. Farmers and producers can sell their produce directly to buyers in the market, eliminating intermediaries and obtaining better prices. Moreover, commodity trading platforms often provide financing options, allowing farmers and traders to access credit based on their commodity holdings
Factors Determining Commodity Prices
Market Demand and Supply
Market demand and supply for traded goods influence commodity prices. Increased demand can lead to short-term price rises, often due to a pessimistic outlook in the stock market, pushing investors towards safer investment options.
Global Scenario
Global events can affect domestic commodity prices. For example, turmoil in Middle Eastern countries can impact crude oil prices, affecting both exports and domestic trading.
External Factors
Any conditions affecting the production of traded goods can impact prices. Higher production costs can lead to higher selling prices and affect the equilibrium rate.
Speculative Demand
Speculative investors can influence commodity prices. They aim to profit from price fluctuations by making predictions and closing contracts before expiration. They can choose either short or long positions based on their market assumptions
Relationship between Stock Market and Commodity Market
When the economy faces inflation, commodity prices surge whereas stock and bond values decline. For instance, during inflation, rising commodity prices on exchanges compel governments to elevate domestic lending rates.
Consequently, investors shy away from stocks due to increased borrowing costs, causing capital sector prices to plummet. Simultaneously, higher lending rates reduce the attractiveness of fixed coupon bonds, leading to decreased demand and falling bond prices.
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