How does the commodities market work?

The commodities market works just like any other market. It is a physical or a virtual space, where one can buy, sell or trade various commodities at current or future date.

One can also do commodity trading using futures contracts. A futures contract is an agreement between the buyer and the seller, wherein the buyer promises to pay the agreed-upon sum at the moment of the transaction when the seller delivers the commodity at a pre-decided date in the future.

A farmer can thus buy wheat futures to fix a price at which he would want to sell a certain amount in future. Similarly, a trader might buy or sell wheat futures for delivery on a future date at a price decided now.

Like a stock, one can invest in a commodity through the commodity bourses.

India has six commodity exchanges Multi Commodity Exchange (MCX), National Commodities and Derivatives Exchange (NCDEX), National Multi Commodity Exchange, Indian Commodity Exchange, ACE Derivatives Exchange and the Universal Commodity Exchange.

The erstwhile regulatory body of these exchanges – Forward Markets Commission – was merged with Sebi in 2015.