Commodity trading is the buying and selling of standardised contracts on physical goods — gold, silver, crude oil, copper, cotton and more — on a regulated exchange. You trade the price of the commodity, usually without ever touching the physical item itself.
What counts as a commodity?
A commodity is a raw material or primary product where one unit is interchangeable with another. Ten grams of pure gold is ten grams of pure gold, whichever refinery it came from. A barrel of a given grade of crude oil is the same as any other barrel of that grade. This interchangeability is what makes commodities easy to standardise and trade — unlike, say, two flats in the same building, which can differ in price for a dozen reasons.
Shares represent ownership in a company. Commodities represent real, physical stuff that the economy runs on: metal for wiring, fuel for transport, grain for food.
How does a sack of grain become something you can trade on a screen?
Physical commodity markets have existed for centuries — the local mandi is one. But physical trade is messy: quality varies, delivery has to be arranged, and prices differ from town to town.
Exchanges solve this by creating a standardised contract. The contract fixes everything in advance — the quantity (say, 1 kg of gold), the quality (a defined purity), the delivery location and the expiry date. The only thing left to negotiate is the price. Because every contract is identical, thousands of buyers and sellers can trade the same thing on one screen, and the price you see reflects the whole market's view.
Most commodity trading in India happens through such contracts — chiefly futures, and options on those futures. If futures are new to you, start with what is a futures contract; the mechanics carry over directly. In India, these contracts trade on the Multi Commodity Exchange — see what is MCX — and on NSE's commodity derivatives segment (NSE Commodities).
Who actually trades commodities?
Three broad groups meet in this market:
- Hedgers — businesses exposed to commodity prices. A jeweller like Anjali, who must buy gold every month for her workshop, can lock in a price today and protect her costs.
- Speculators — traders with a view on prices. Arjun believes copper prices will rise as construction picks up, so he buys a copper futures contract hoping to sell it higher. He takes on the price risk the hedger wants to shed.
- Arbitrageurs — participants who profit from small price gaps between related markets, and in doing so keep prices aligned.
Each group needs the others. Without speculators, Anjali would struggle to find someone to take the other side of her hedge. We look at all of them in who uses commodity markets — hedgers, speculators and arbitrageurs.
Is commodity trading the same as buying gold jewellery?
No. When you buy jewellery or a coin, you own the metal and can hold it for years. When you trade a gold futures contract, you hold a position that expires on a set date, requires margin money, and gains or loses value daily with the price. It is a trading instrument, not a locker investment — and losses can exceed what you initially put in, because futures are leveraged.
Things to keep in mind
- Commodity contracts are leveraged: you deposit a margin that is only a fraction of the contract's full value, so both profits and losses are magnified.
- Commodity prices respond to global events — currency moves, weather, geopolitics — many of which unfold outside Indian market hours.
- Every contract has an expiry date. Unlike shares, you cannot simply hold a futures position indefinitely.
- Start by understanding the contract you are trading — its size, expiry and settlement method — before you ever place an order.
Read next
Which commodities can I trade in India? — Now that a commodity contract makes sense in principle, see which ones actually trade in India and what drives each family.