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10 key terms to understand the commodity market

Commodity | September 29

For investors, commodity market is a great place for diversifying their investment portfolio. Technology and regulations have organised and improved the process of commodity trading in India. Energy, Agricultural Products, Metals and bullions can be traded in the commodity market in India. 

Let’s try to understand the commodity market with 10 commonly-used terms in the market.

  1. 1.Basis

The term ‘basis’ is used to indicate the difference in price of a commodity as per its most recent futures contract and the current price of the commodity in the underlying spot market.


  1. 2.Cash Commodity

A physical commodity bought or sold in actual is called a cash commodity. Actuals are physical commodities available in storage, for shipment or for manufacturing.


  1. 3.Contract grades

Commodities with contract grades qualify for delivery of a futures contract because their grades have received the official approval by a commodity market exchange.


  1. 4.Grading certificates

These certificates are offered to commodities along with a grade by testers, graders, inspectors and other credible entities. The grades are given depending on the quality of the commodities that can be used for trading purposes.


  1. 5.Stop loss order 

Investors who want to reduce the losses due to market movements can assign a stop loss order when the market reaches a certain position as given in the order. With stop loss order, commodity market traders can manage their risks and save money.


  1. 6.Cash Market

It is a place where people can buy or sell the actual commodities using cash. Cash market is also known as spot market.


  1. 7.Clearing house

It is a third party kind of agency or corporation that takes care of clearing trading transactions, settling trading accounts, maintaining margin money, regulating delivery and more. It acts as a buyer to clearing member sellers of futures and options contracts, and as a seller to clearing member buyers of these contracts.


  1. 8.Convergence

Convergence is the point at which the future contract price and cash price are close to each other with a basis value of zero or almost zero.


  1. 9.Contango

It is a scenario in the commodity market where the price of the contract is greater than the spot price. 


  1. 10.Backwardation 
  2. The trading is called backwardation trading in the commodity market when the premature contracts or spot prices are higher than the futures contract.

For the curious minds in commodity market trading, here is a link to a document by PwC on terms used in trading of oil and gas, utilities and mining commodities: 

https://www.pwc.com/gx/en/energy-utilities-mining/pdf/eumcommoditiestradingriskmanagementglossary.pdf

With online trading, commodity market brokers and investors have found more convenient ways to manage trading. For commodity market trading, an online trader selects the commodity, quantity, price and more to create an order. Also, for easy fund transfer to manage your trading, your bank account is linked to your trading account. 

So, when the trader buys or sells the order, the transaction is completed within moments. And almost immediately, the trader receives a confirmation of the market order right on the screen of their computer or handheld devices. An active internet connection is required for these transactions.

Earlier, commodity trading was a tedious process. Today, the planning of trade can be done using trading tools. Market analysis is available through charting methods online. With everything available at your fingertips, entering the commodity market as a trader is an easy journey.

Finally, it would be right to conclude that the ease of online trading with online demat account and trading account appeals to new investors in the securities market. Invest in the commodity market with Tradebulls, a leading investment service provider -


Let’s discuss more about commodity markets. Share your thoughts through comments.

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Aasif HiraniDirector Tradebulls

Aasif Hirani is the Director of Tradebulls Securities (P) Limited. Chartered Accountant (C.A.) by qualification, Mr. Aasif Hirani brings with him over 10 years of rich experience in the finance industry.

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