What are the types of commodity market?

A commodity market is an exchange place for buying, selling and trading, either raw materials or primary products. The raw materials or the primary products are called commodities. The commodities are divided into two types, hard and soft.

Hard commodities include natural resources predominantly:

1. There is the bullion which includes gold and silver.
2. There are the base metals such as aluminium, brass, copper, zinc etc.
3. There are also energy resources which include crude oil and natural gas.
Soft commodities include agricultural products such as pepper, cardamom, cotton etc.

Commodities trade in two different types of market, spot market and derivative market. In the spot market, the traders engage in the buying and selling activity for immediate cash delivery.

The derivative market involves different types of contracts such as futures, options and forwards. These contracts are based on commodities, which are the underlying assets.

1. In the futures contract, traders buy or sell the underlying asset at an agreed price on a pre-defined date. In a futures contract, the trade is mandated to happen, and the traders are obliged to execute their buy or sell order.

2. Forward contracts are similar to futures contracts. However, they are not traded in the stock exchange markets.

3. In the options market, the traders engaging in the buying or the selling activity is not obliged to execute their orders. Instead, they can get relieved from the contract by paying a premium amount.

Trading in commodities requires sound knowledge and experience in the financial markets.
In India, the two main types of commodity markets are:

1. Multi Commodity Exchange (MCX): A futures exchange where various commodities such as metals, energy, and agricultural products are traded through futures contracts.
2. National Commodity and Derivatives Exchange (NCDEX): Another futures exchange specializing in agricultural commodities like pulses, grains, spices, and other agricultural products.

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